Evasion of Excise Duties in India: Study of Cotton Textile .... Study Of Cotton...Appendix Ii: Questionnaire Circulated for the Survey on Cotton Textile Fabrics 314. 1 Excise Duty

Evasion of Excise Duties in India: Study of Cotton Textile Fabrics

PREPARED B Y :

M. Govinda Rao Gopinath PradhanR ESE A R C H A SSIST A N C E B Y : Satya Pal

Preface

T h e N ational In stitu te o f Public F inance and Policy is an au to nom ous, non-pro fit o rgan isa tion w hose m ajor functions are to carry ou t research , do consultancy w ork and undertake tra in in g in the area o f public finance and policy.

The study o f Excise D u ty Evasion on C o tto n Textile Fabrics was en tru sted to the In s titu te by the C en tra l Board o f Excise and C ustom s, M in istry o f F inance, G overnm ent o f Ind ia . This re p o r t w hich is being subm itted to the B oard w as p repared by a staff team under the leadersh ip o f D r. M G ovinda R ao w ho to o k over from Dr- D K S rivastava w ho s ta rted the study . D r. R ao p lan n ed and organised the study, and d rafted i t jo in tly w ith D r. G o p in a th P radhan .

I t is earnestly hoped th a t the p a in stak ing w ork undertaken by the study team and the com prehensive analysis o f various issues p resen ted in the re p o rt w ould be found useful for the w ork o f the B oard .

The G overn ing Body o f the In stitu te does no t take res­ponsib ility fo r any o f the views expressed by the au th o rs in the research pub lications o f the In stitu te . The responsibility fo r the view s expressed belongs to the D irec to r and the staff o f th e In stitu te and m ore p a rticu la rly to the au th o rs o f the concerned rep o rt.

R .J. C H ELLIA H

Introduction

C o u n t e r i n g evasion o f excise du ties w ith suitable policy m easures necessitates understand ing o f the modus operandi and quan tifica tion o f the ex ten t o f evasion in respect o f im p o rtan t com m odities. T herefore, the 28th R e p o rt o f the E stim ates C om m ittee (1978-79: 6 th L ok Sabha, p a ra 7.25) stated . .th a t evo lu tion o f som e em piric, th ough loose, yardsticks to a ttem p t a guess, i f n o t an estim ate, ab o u t the extent o f excise evasion is very necessary and th a t a fresh determ ined bid may be m ade fo r the p u rp o se .” K eeping this in view , the C en tra l B oard o f Excise and C ustom s en trusted a study to the N ationa l In s titu te o f Public F inance and Policy to u ndertake em pirical studies on the evasion o f excise duty in respect o f som e im p o rta n t com m odities. T he In stitu te has already com pleted the studies and subm itted rep o rts on tw o im p o rtan t com m odities, nam ely C opper and C opper A lloys, and Plastics. The p resen t study is concerned w ith the evasion o f excise duty in respect o f an o th e r im p o rta n t com ­m odity— co tto n textile fabrics.

We adop ted a b ro ad stra tegy to und erstan d the modus operandi o f evasion and to evolve a su itable ap p ro ach to q uan tify it by ho ld ing discussions w ith academ ic eco n o m ists , concerned G overnm en t officials, textile techno log ists and represen tatives o f textile m an u fac tu rers’ associations. A m ong the officials w ith w hom we held usefu l discussions w ere the officials o f the C ollec to ra te o f C entral Excise, B om bay; Office o f th e Textile C om m issioner, B om bay; B ureau o f In d u s tr ia l C osts and Prices, New D elhi; M ill O w ners’ A ssociation , B om bay and P ow erloom Industries A ssociation , B om bay. Besides, we visited some textile mills and held extensive d iscus­sions w ith the officials there . These d iscussions have been extremely useful in iden tify ing the issues an d evolving a m ethodology to e stim ate the ex ten t o f evasion.

I t is necessary to recall the help we have received from various persons in conducting th is study. O ur principal debt is to D r. R J C helliah , w ho w as a constan t source o f en co u ­ragem ent th ro u g h o u t. Besides a num ber o f useful discussions we have h ad w ith him , he w en t th ro u g h the d ra ft o f the R ep o rt w ith m eticulous care and suggested num erous im p ro ­vem ents. The p ro jec t was initially started by D r. D K Sri­vastava; we have had the benefit o f referring to the e laborate notes p repared and a w ealth o f in fo rm ation ga thered by him , particu larly the in fo rm atio n collected from the mills th rough a special survey. He also p repared three d raft chap ters o f the rep o rt w hich, because o f the different m ethodology a d o p t­ed by us, could no t be u tilised. M eaningful com m ents on the d ra f t by D r. S hankar N A charya and D r. A run K um ar have resulted in vast im provem ent in the m ethodology and p resen t­ation o f the study. We are indebted also to Prof. D U Sastry o f the In stitu te o f E conom ic G ro w th , New D elhi, M r. P R V R am anan , A dd itio n a l C ollector o f Excise, New D elhi, M r. R L N V ijayanagar, Secretary G eneral, Mill O w ners’ Asso­ciation , B om bay, and D r. K R S alho ta and D r. V K A ggarw al, D ep artm en t o f Textile Technology, Ind ian In s titu te o f Tech­nology, New D elhi, for sparing tim e fo r discussion a t various stages o f the study . E dito ria l assistance was received from M r. C h ristopher Cecil. R esearch assistance to the p ro jec t w as rendered by M r. Satya Pal and the R ep o rt was typed by M r. Perianna and M r. R S Tyagi while final typing was done by M r. Jagdish A rya. We are th an k fu l to all o f them .

M . G ovinda R ao G o p in a th P radhan

Contents

Page N o .

Preface 205In tro d u ctio n 2061. Excise Duty on Cotton Textile Fabrics:

Revenue Yield and Evasion 2092. Anatomy of Cotton Textile Industry—

Some Important Features 2163. Structure o f Excise Duty on Cotton Textiles 2244. Excise Duty Evasion—An Empirical Estimate 2385. Reform of Excise Duty on Cotton Textiles— 286

Broad IssuesR eferences 295

A ppendix I: S tructu re o f Excise D uty on C o tto nTextile Fabrics 298

A ppendix I i: Q uestionnaire C irculated fo r theSurvey on C o tton Textile F ab rics 314

1

Excise Duty on Cotton Textile Fabrics: Revenue Yield and Evasion

Overview

A l t h o u g h tax evasion is a un iversal p henom enon , it is o f particu lar concern to policy m akers in developing countries. In these coun tries, the pressing need fo r m obilising savings and a ttem p ts to com bine m ultip le objectives in the tax laws have enorm ously com plicated the tax structu re . T he resulting high and differential tax ra te s w ith varied exem ptions and deductions open up num erous avenues o f evasion; the exis­tence o f large unorgan ised fac to r and p ro d u c t m arkets and low levels o f m onetisa tion ren d e r evasion easier, thereby m aking the p rob lem m ore serious. As in o ther developing countries, in In d ia too the issue is o f im m ense relevance to the larger task o f socio-econom ic developm ent.

In spite o f the im p o rtan ce o f the subject in policy-m aking, very few stud ies have been conducted in In d ia on tax evasion. F u rth e r, the few studies th a t exist have been largely confined to the evasion o f d irect taxes, p a rticu la rly the personal incom e tax, and there is hard ly any im p o rtan t em pirical study on the evasion o f com m odity taxes1. G iven th a t the yield o f

1 The studies on the evasion of sales tax conducted by the Commodity Taxes Enquiry Committee (1976) in Kerala and by the National Institute of Public Finance and Policy (NIPFP, 1981) in Bihar are exceptions to this.

com m odity taxes p redom inates in the tax revenues o f the developing countries, this is an obvious lacuna and the present study a ttem p ts to fill the gap, a t least partia lly . The purpose o f the presen t study is to analyse and quantify the extent o f evasion o f excise duties in respect o f an im p o rta n t com m o­dity , nam ely , co tto n textile fabrics1.

Excise on Cotton Textile Fabrics: Trends and Issues

C otton tex tile fabrics have been subject to excise duty since 1949. Being one o f the o ldest levies, it has no t only been used to m obilise su bstan tia l revenues over the years, bu t has also served as an im p o rtan t to o l in regu lating the g row th o f the co tton textile industry .

The revenue co n trib u tio n o f co tton fabrics th rough basic, special and add itiona l duties o f excise has by no m eans been sm all. These du ties on fabrics con tribu ted as m uch as Rs 168.3 crore in 1981-82. T ogether w ith the duties on co tton y arn , the co n trib u tio n in the year am ounted to R s 271.7 crore. O f the to ta l tax yield from c o tto n fabrics, a lm ost 70 per cent was co n trib u ted by the com posite mills and the rest w as collected from pow erloom s an d handloom s.

A lthough in ab so lu te term s the yield seems im pressive, as a p ro p o rtio n o f to ta l excise revenue, th e co n trib u tio n from co tton textile fabrics is n o t only sm all but has a lso been declin ing over tim e. The p ro p o rtio n o f excise revenue from co tton fabrics to to ta l excise revenue declined from 4.2 per cen t in 1970-71 to a m ere 2.3 p er cen t in 1981-82. D urin g the p erio d , the ra te o f g ro w th o f excise revenue from c o tto n fabrics (7.39 p er cen t) was a lm ost h a lf o f the g row th o f excise revenue in the aggregate (13.8 per cen t).

The relative stagnancy in the yield o f excise on co tton fabrics should tru ly be o f g reat concern to the policy-m akers. T here are reasons to believe th a t the lim ita tions placed o n the o u tp u t and the d iscrim inato ry tax a tio n o f the com posite mill

2 Similar studies in respect of two other commodities, namely, copper (Srivastava, 1982) and plastics (Sinha, tiagchi and Sud, 1983), form the preceding sections of this publication.

sector vis-a-vis the decentralised sector are im portant factors contributing to this sluggishness. To examine this, we have related the excise yield o f cotton fabrics with the output index and the price indices in log-linear regression m odel. The inform ation on output has been taken from the Handbook o f Statistics on Cotton Textile Industry published by the Textile Com m issioner and the inform ation on the price variable relates to the wholesale price index o f C otton Textiles given the Reserve Bank o f India Bulletin. The period o f analysis is from 1970-71 to 1981-82. The results are given below:1. Log T = 0.87238 - 0.2012 Log Ot + 1.0011* Log P

- ( 1 .2 0 8 1 ) (24.1157)R 2 = 0.9797 F = 290.85 D .W . Stat. = 2.2501

2. Log T = 0.5252 — 0.0703 Log Om — 0.1339 Log Oa +- ( 0 5 8 1 1 — (0.7486)

1.0191* Log P _ (10.9230)R 2 = 0.9761 F = 164.08 D .W . Stat. = 2.1708

whereT = Excise revenue from cotton textile fabrics,

Ot = Total textile production index,Om = Textile production index o f com posite mills,Od = Textile production index o f the decentralised

sector,P = W holesale price index o f cotton textiles,

* = Significant at 1 per cent level. Figures in brac­kets represent t statistics.

These regression equations provide interesting insights. It may be seen that increases in revenue from the excise duty on cotton fabrics are alm ost entirely explained by price increases having the elasticity value o f around unity. Increases in out­put, both when taken in the aggregate as well as when com ­posite mill output and decentralised sector output are taken separately, do not affect the revenue from excises at all. In fact, the negative signs o f the output variable, although in­significant, show a tendency o f inverse relationship between revenue from excise duty and the output variables.

The lack o f re la tionsh ip betw een changes in aggregate o u tp u t o f textiles and changes in the excise yield could be sought to be explained by tw o causes. F irs t, the p ro p o rtio n o f the o u tp u t o f the decen tra lised sec to r having h igher exem­p tion and low er tax rates m ight have increased over tim e so th a t the yield has rem ained ra th e r stag n an t a lthough o u tp u t in the aggregate has show n increases over tim e. But, a lth o u g h the p ro p o rtio n o f the o u tp u t o f decentralised sector has increased over tim e, th is explanation w ould n o t be en tire ly satisfactory , for, the revenue from excise duties does no t show any significant re la tionsh ip w ith the o u tp u t index even w hen the mill sector and decentralised sector indices are taken separately . Secondly, the absence o f re la tionsh ip is possible i f the tax ra tes have fa llen over tim e, bu t as we do n o t discern such a tendency this exp lan a tio n too canno t hold.

T he absence o f re la tio n sh ip betw een revenue from excise duties and o u tp u t index o f the mill sector, too , can n o t be easily explained. The p ro p o rtio n o f m ill o u tp u t exem pted from excise du ties, th a t is, exports, in fac t fell from 9.72 per cen t in 1970-71 to 7.29 per cent in 1981-823. S im ilarly, the p ro p o rtio n o f con tro lled c lo th produced in the mill sector on w hich low er tax ra te s are app licab le , fell from 18.48 per cent in 1974-75 to 11.39 per ccn t in 1981-82. As the rates o f tax d id n o t fall over tim e, there does n o t seem to be a satisfactory explanation . The only plausible exp lanation is th a t the degree o f evasion o f excise du ties on m ill sector c lo th has increased over tim e.

A n o th er p o in t o f in te rest is th a t the revenue from excise duties and p ro d u c tio n o f c lo th in the decentralised secto r are also unre la ted . G iven the tax ra te , such lack o f re la tio n sh ip can occur w hen (i) the p ro p o rtio n o f item s subject to low er tax ra tes has increased c /e r tim e o r (ii) item s on w hich higher ra te s o f duty are leviable are increasingly m isclassified as those subject to low er rates o f d u ty . B roadly speaking, the p ro p o rtio n o f p ow erloom o u tp u t w hich is subject to h igher

3 With effect from 1.4.1980, full exemption has been granted also to controlled cloth as against 50 per cent reduction in rates that prevailed earlier.

ra tes o f taxation th an the hand loom o u tp u t h as been increas­ing over tim e an d , therefore , the hypothesis a t (i) above is n o t helpful in explaining the lack o f re la tionsh ip . H ow ever, there does exist independen t evidence o f pow erloom o u tp u t being misclassified as the o u tp u t o f the hand loom secto r and the extent o f this m isclassification could indeed have been increasing over tim e. Sim ilarly, evidence o f m isclassifying pow er-processed fabrics as hand-processed also exists. These will be explored fu rth e r in C h ap te r 3.

Model of Tax Evasion—Some Obvious Lessons

The theoretical m odels o f tax evasion, generally , have been built on the basis o f the experiences o f persona l incom e taxes. O n the assum ption th a t u tility is a function o f incom e only, it can be said th a t the taxpayer in o rd e r to m axim ise his u tility chooses to declare only a p o rtio n o f his incom e (Alling- ham and Sandm o, 1972; S rin ivasan, 1973). The p ro p o rtio n o f incom e declared for tax purposes w ould depend upon the changes in the level o f his incom e, the tax ra te , the p ro b ab i­lity o f investigation and detection and the penalty ra te th a t w ould be im posed.

In th is m odel the effect o f changes in the level o f incom e and tax ra tes on the declared incom e is no t clear. W hen the ac tual incom e varies the p ro p o rtio n o f incom e declared increases, stays co n stan t o r decreases, depending upon w hether the tendency to w ard s risk aversion increases, rem ains co n stan t o r decreases w ith incom e. Sim ilarly, a lthough increases in the tax ra tes m ake it m ore profitable to evade taxes on the m argin (substitu tion effect), they also m ake the taxpayer less w ealthy and hence act in the opposite d irec tion to reduce evasion (incom e effect).4

The o th e r tw o p aram eters o f the m odel, nam ely, the penalty ra te an d probability o f de tection , how ever, show un­am biguous results. B oth an increase in the penalty ra te as well as higher p robab ility o f detection have a de terren t effect

1 This, however, requires an additional assumption of decreasing abso­lute risk aversion on the income scale.

on evasion. Besides, they are in te r-re la ted in th e ir effects on tax evasion and the po licy-m akers do have the op tio n o f choosing the ap p ro p ria te policy m ix o f penal ra te and streng ­then ing the enfo rcem ent m achinery to check tax evasion.

It should be no ted th a t the probability o f de tec tion has an im p o rta n t bearing on the m ethods o f evasion. It is logical to presum e th a t the taxpayer assigns different p robab ilities to d ifferent m ethods o f evasion and chooses tho se having the low est p robab ilities. T hus, a person can take recourse to m ore th an one m ethod o f evasion if he assigns equally low p robab ilities to these m ethods. Sim ilarly, in an econom y, there can exist several m ethods o f evasion as the probabilities assigned to the a lternative m ethods m ay differ am ong differ­en t taxpayers.

T hough these m odels o f tax evasion a re pertin en t to the personal incom e taxes, the genera lisa tions can also be applied to the evasion o f com m odity taxes w ith equal valid ity , and the ex ten t and m ethods o f tax evasion w ould indeed depend upon the fac to rs m entioned above.

The m ethods adop ted to evade taxes depend upon the avenues o f tax evasion w hich arise from the n a tu re o f the tax s truc tu re itself. The evolu tion o f the tax structu re is d e te r­m ined by the objectives o f tax policy and the im p o rtan ce o f various pressure g roups in influencing it. Levying o f ad valorem taxes to raise revenues w hich w ould keep pace w ith the price situ a tio n gives rise to the possibility o f evasion by un d ersta tin g the value o f o u tp u t either by suppressing the quan tity o r undervalu ing the goods. Im position o f a ra te s truc tu re differentiated accord ing to different qualities o f a com m odity in th e p u rsu it o f equity could give rise to m is­classification o f the p roduct. Levying taxes a t higher ra tes on the p roducts o f the cap ita l-in tensive sector than on the labour-in tensive sector to p rom ote em ploym ent generation may lead to evasion o f the tax th ro u g h in ter-sec to ral m is­classification o f the com m odity .

Plan of the study

T hus, the m ethods em ployed to evade taxes could arise

from the tax s tru c tu re itself. But a ttem p ts to evade and avoid taxes influence the p a tte rn o f p ro d u c tio n in term s o f the quality and type o f goods produced, the processes o f p ro d u c­tion adop ted and the type o f technology em ployed. Som e­tim es, it m ay be possible to infer the n a tu re and extent o f tax evasion by exam ining the p a tte rn o f p ro d u c tio n o f the con­cerned p roducts in re la tio n to the s tru c tu re o f tax a tio n on these com m odities.

K eeping the above fact in view, we devote the second ch ap te r to an analysis o f the profile o f the co tto n textile ind u stry in Ind ia . C h ap te r 3 discusses the s truc tu re o f the excise tax and relates it w ith the possible m ethods o f evasion. C hap te r 4 m akes an a ttem p t to quan tify the revenue loss th a t could have occurred due to the ad o p tio n o f different m ethods o f evasion. The choice o f a reference year, 1978- 79, for th is purpose is largely guided by the availab ility o f d a ta . F inally , we have tried to address the b ro ad issues o f reform o f the excise on c o tto n textile fab rics in C h ap te r 5.

2

Anatomy of Cotton Textile Industry: Some Important Features

Introduction

As m entioned in the previous chap ter, there is a tw o-w ay re la tionsh ip betw een the s tructu re o f excise duty and s tru c ­tu re and g ro w th o f the co tton textile industry . The structure o f excise du ty th rough its im pact on relative prices affects the dem and p a tte rn for co tton textiles in term s o f d ifferent q u a li­ties o f fabrics and fabrics o f different sectors, besides affect­ing the re lative dem and fo r co tto n c lo th as a w hole vis-a-vis the dem and fo r o th e r com m odities. A t the sam e tim e the changed p ro d u ctio n p a tte rn due to b o th the changed dem and p a tte rn and the supply situation affects the excise revenue from co tton textile fabrics. Thus, the p a tte rn o f p ro d u c tio n o f co tton textiles and the s tru c tu re o f excise levy are in te r­connected. An analysis o f the p a tte rn o f g row th over tim e of co tton textile p roduction could therefore prov ide useful in­sights in to the possib ility and extent o f excise evasion.

U nfo rtuna te ly , we do n o t have adequa te in fo rm ation on the num ber o f loom s and cloth produced in the pow erloom and hand loom sectors in the country . O n the num ber of loom s, w hatever in fo rm ation we have is based on som e surveys conducted fo r various study g roups on these sectors appo in ted by the C om m erce and Industry M inistries. As regards the cloth produced in the different sectors, the esti­m ates are arrived a t on the basis o f yarn deliveries fo r civil

consum ption . All y a rn delivered in h ank form is construed to have been used by the handloom s and the rest o f the yarn delivered fo r the decentralised sector is p resum ed to have been used by the pow erloom s. The estim ates o f c lo th p roduc­ed are arrived a t by m erely applying the conversion ra tio o f 10 m etres o f c lo th fo r every kilogram o f yarn used. W hile it is recognised th a t these estim ates do have a system ic bias, a m atte r w hich will be discussed in deta il in C h ap te r 4, we have to a d o p t such estim ates for the purpose o f analysing the g row th o f the c o tto n textile industry in India.

Growth of the Cotton Textile Industry:An In ter-Sectoral Analysis

An im p o rtan t feature o f the g row th o f the textile industry during the last 30 years is the phenom enal g row th o f the decentralised sector in general and pow erloom s in pa rticu la r. The num ber o f loom s in the pow erloom sector, as may be seen in T able 2.1, increased substan tia lly from 23,800 in 1951 to 4,83,000 in 1982, thus registering a g ro w th ra te o f 10.5 per cent per annum . T he corresponding g row th ra tes o f looms in bo th the mill sector and the hand loom secto r w ere very low at 0.2 per cen t and 1.1 per cent respectively. T hus, the pow er­loom sector w hich constitu ted only 0.8 per cen t o f the to ta l loom s in 1951 phenom enally increased its share to 10.3 per cent in 1982, a t the expense o f the share o f bo th the mill and the hand loom sectors. The share o f the m ill sector declined over the period by 1.8 percentage po in ts from 6.3 to 4.5 and the decline in the handloom sector during the period w as o f a higher m agnitude at 7.7 percentage po in ts.

A lthough the above figures refer to all types o f textiles, there is no reason to believe th a t the trend in co tton textiles has been different. In fact, the available in fo rm ation ind i­cates th a t the grow th o f co tto n loom s in the pow erloom sector has been even faster. F o r exam ple, co tto n loom s in 1963 num bered a round 80,000, form ing only 54.8 per cent o f the to ta l num ber o f loom s, w hereas in 1982, they num ber­ed 3,07,000 and fo rm ed 63.6 per cent o f the loom s in the sector.

TABLE 2.1

Growth of Looms in Cotton Textile Industry

Year Mills Powerlooms* Handlooms Total

1951 1,94,400 23,800 28,50,000 30,68,000(6.3) (0.8) (92.9) (100.0)

1963 2,00,000 1,46,000 20,00,000 23,46,000(8.5) (6.2) (85.3) (100.0)

1982 2,10,000 4,83 000 40,00,000 46,93,000(4.5) (10.3) (85.2) (100.0)

Compound growthrate of looms 0.2 10.4 1.1 1.4(per cent per annum)

Note-. • Includes non-cotton looms also.Source: Mill Owner's Association, Bombay. Memorandum submitted

to the Tripartite Committee on the conditions of workmen of the Textile Mill Industry and the Problems of the Textile Industry, December, 1982, p.79.

In term s o f c o tto n clo th p ro d u ctio n also , the trend has been sim ilar. Even if we take the official estim ate , it is seen th a t the o u tp u t o f pow erloom s increased a t a phenom enal ra te o f ab o u t 11.9 per cen t per annum from 151 m illion m etres in 1956 to 2721 m illion m etres in 1982, (Table 2.2) As against th is, the o u tp u t o f the com posite mill sector declined sub­stan tia lly even in abso lu te term s and th a t o f handloom s increased a t a m uch slow er ra te o f 2.3 per cent. The pow er­loom o u tp u t w hich in 1956 form ed only 2.3 per cen t o f the to ta l clo th o u tp u t, increased by ab o u t 18 tim es over a q u a rte r cen tu ry to form abou t 35 per cen t. I t should be noted th a t official estim ates und ersta te the p roduction o f pow er­loom s significantly, fo r, it is believed th a t a large p a rt o f the hank yarn is consum ed by pow erloom s 1 (D esai, 1981;

1 It is believed that the official estimates understate powerloom output also for other reasons. First, on the basis o f a survey, it is known that about 7-10 per cent of hank yarn is used by the powerlooms in the manufacture of certain categories of output like sarees. Second, a kilogram of yam produces 15 metres o f cloth for higher counts of yarn (more than 41s) as against 8 metres for lower counts. As the proportion of higher count yarn consumed by the powerlooms is larger, the official estimates are understated. (On this, see Mazumdar, 1984 and Jain, 1983.)

TABLE 2.2

Estimated Cotton Cloth Production in Different Sectors

(In million metres)

Year Mills Powerlooms Handlooms Total

(1) (2) (3) (4)

1956 4852 151 1483 6486(74.8) (2.3) (22.9) (100.0)

1960 4616 491 1642 6749(68.4) (7.3) (24.3) (100.0)

1971 3957 1419 1980 7356(53.8) (19.3) (26.9) (100.0)

1976 3881 1734 2330 7945(48.8) (21.8) (29.3) (100.0)

1977 3223 1638 2040 6901(46.7) (23.7) (29.6) (100.0)

1978 3251 1884 2190 7325(44.4) (25.7) (29.8) (100.0)

1979 3206 2014 2320 5740(42.5) (26.7) (30.8) (100.0)

1980 3476 2268 2570 8314(47.8) (27.3) (30 9) (100.0)

1981 3147 2453 2520 8120(38.5) (30.2) (31.0) (100.0)

1982 2347 2721 2720 7788(30.2) (34.9) (34.9) (100.0)

Notes : 1. Figures in parentheses indicate percentages of total.2. Figures in Col. (2) are estimated by deducting volume of

handloom cloth from that of total cotton cloth production in the decentralised sector.

Source : For Col. (1): Indian Cotton Mills Federation —Handbook o f Statistics on Cotton Textile Industry, Bombay, 1983.For Col. (2): Ibid. (Estimated on the basis of figures pertain­ing to delivery of hank yarn.)

A nand, 1979 and Ja in , 1983). I f this is taken account of, the p ro p o rtio n o f pow erloom o u tp u t w ould be m uch larger and the g row th o f pow erloom o u tp u t w ould be m uch higher.

Thus, bo th in term s o f num ber o f loom s a.id c lo th m a n u ­fac tu red , the pow erloom secto r has show n a phenom enal g row th . It has increased its share in the o u tp u t significantly

over the tim e period considered a t the expense o f the shares o f bo th th e mill and the handloom sectors. Thus, a lthough the o u tp u t per loom has show n a declining trend in all the three sectors, the decline over the period from 1963 to 1982 has been m uch slow er in the case o f pow erloom s (16 p e rc e n t) than in the case o f the mill sector (50 per cent) and the h an d ­loom sector (33 per cent). A p a rt o f th is trem endous fall in the mill sector o u tp u t can be explained by the heavy p roduc­tion losses incurred during the year 1982 due to the textile strike, bu t even the re lev an t figures fo r 1981 show th a t per loom o u tp u t declined by ab o u t 40 per cen t from the level existing in 1963.

A dm ittedly , th is is the outcom e o f the G overnm ent policy transla ted in term s o f bann ing the expansion o f w eaving capacity in the mill sector since 1956, and the d iscrim inato ry levy o f excise duties on the o u tp u t o f the mill secto r vis-a-vis those o f the pow erloom s and the hand loom s. C oupled w ith this is the g rea ter possibility o f evasion o f the du ty in the pow erloom sector than in the mill sector. As pow erloom s o f various sizes opera te th ro u g h o u t the co un try an d it is likely th a t a large n u m b er o f them are u n au th o rised , the probab ility o f detecting evasion in decentralised un its is rem ote. Thus, the difficulties o f m o n ito ring the levy can give rise to w ide­spread evasion o f the du ty on the o u tp u t o f the pow erloom sector. The precise m anner in w hich this could be done will be discussed in the next ch ap te r.

Pattern of Production

As m entioned earlier, G overnm ent policy has been gene­rally to re stric t the expansion o f the w eaving capacity in the com posite mill sec to r. N evertheless, it w as expected th a t the mills would produce sufficient yarn to ca te r to the needs o f the decentralised sec to r—p articu la rly the pow erloom s. As a resu lt, the expansion o f mills was p redom inan tly in the ir spindlage. The num ber o f spindles over the last decade grew a t the ra te o f 1.7 per cent p er year a lthough g row th o f co tton yarn o u tp u t during the period was only 0.5 per cent.

A n im p o rtan t fea tu re o f yarn p roduction , how ever, is the

count-w ise p ro d u c tio n o f yam in re la tion to the quality o f co tton available fo r spinning. Till 1966, there w as little ind i­genous p roduction o f long-staple c o tto n w hich was used to p roduce higher coun ts o f yarn . B ut since then , the p ro d u c­tion o f these varie ties o f co tto n increased substan tia lly and by 1980, m ore th an 25 p er cen t o f the co tto n used w as the long-staple variety p roduced indigenously. W hat is no tab le how ever is, th a t a lth o u g h the p roduction p a tte rn o f yarn also did m ove to w ard s h igher coun ts d u ring th is period , it d id n o t increase com m ensurately w ith the sh ift in the staple com position o f co tto n availab le fo r spinning. I t thu s seems th a t th e new supplies o f long-stap le co tto n are used largely in the p ro duc tion o f yarn o f m edium counts occasioned by the dem and p a tte rn fo r c lo th influenced, am ong o th e r th ings, by th e s tru c tu re o f excise d u ty on y a rn and clo th . T he im p­lication o f th is to the econom y is clearly low er to ta l clo th o u tp u t, fo r, the y a rn -to -c lo th conversion ra tio fo r h igher coun ts o f yarn is h igher.

A n im p o rta n t fea tu re o f p ro d u c tio n o f c lo th in the coun try is the relative specialisation o f the th ree different sectors. The exam ination o f the p ro d u c tio n p a tte rn reveals th a t while the m ill and h and loom sectors produce, in the m ain , fabrics o f m edium and coarse varieties, the p roduction o f the pow erloom sector is largely confined to c lo th o f higher counts (Table 2.3). T hus, in 1978-79 while the p ro p o rtio n o f clo th o f less th an 41 coun ts in the to ta l c lo th o u tp u t o f com posite m ills and hand loom s w as as high as 92 p er cent an d 86 p er cent, respectively, the co rrespond ing p ercen t­age for pow erloom s was only 72. S im ilarly , while the share o f c lo th o f m ore than 41 counts in the case o f pow erloom s was as m uch as 28 per cen t, the shares o f hand loom s and the com posite m ills were m uch low er a t 14 and 8 per cent, respec­tively. This relative specialisation o f the th ree sectors ind i • cates one im p o rtan t fea tu re . As higher counts o f c lo th are charged excise du ty a t h igher ra te s , the am oun t and the ra te o f tax saved by evading and avo id ing the tax w ould be higher for cloth o f h igher coun ts. G iven fu rth e r th a t the pow erloom o u tp u t is a closer substitu te to the m ill o u tp u t than the o u t­p u t o f hand loom s, and th a t the p rob ab ility o f detection o f

TABLE 2.3

Variety-wise Production of Cotton Fabrics in Different Sectors in (1978-79)

(In million metres)

Variety Yarn used (in count groups)

MillSector

Powerloom Handloom Total

Superfine 61s and above 167 195 103 465(5.23) (11.03) (5.04) (6.64)

Fine 41s to below 61s 94 301 191 586(2.95) (17.02) (9.34) (8.37)

Medium-A 26s to below 41s 1623 696 445 2764(50.86) (39.27) (21.76) (36.46)

Medium-B 17s to below 26s 889 347 753 1989(27.86) (19.63) (36.82) (28 40)

Coarse Below 17s 418 229 553 1200(13.10) (12.95) (27.04) (17.13)

TOTAL 3191(100.00)

1768(100.00)

2045(li'O.OO

7004(100.00)

Note: Figures in parentheses indicate percentage of production.

Source : Government of India, Ministry of Finance, Department of Revenue. Report o f the Expert Committee on Tax Measures to Promote Employment, New Delhi, 1980.

212 EVASION

OF EXCISE

DUTIES IN

INDIA: STUDY OF

COTTON TEXTILE

FABRICS

evasion is low in th is secto r due to its decentralised na tu re , it is n o t surprising th a t it specialises in the p roduction o f these superio r varie ties o f c lo th .

The salient featu res o f the textile industry no ted above are, a t least in p a rt, due to the s tru c tu re o f excise du ty on co tto n textile fabrics and the in d u stry ’s response to this by evolving a p a tte rn in its a ttem p t to avoid and evade the tax. I t w ou ld , therefore, be in teresting to analyse the s truc tu re o f excise du ty on c o tto n textile fabrics and identify the m eans o f evasion o f the tax. This, we a ttem p t in the next chap ter.

3

Structure of Excise Duty on Cotton Textiles

Introduction

T h e stru c tu re o f a tax is determ ined by, inter alia, the ob jec­tives o f tax policy . In the case o f excise du ties on co tton textile fabrics, the objective o f m aking revenue keep pace w ith inflation has resu lted in the levy o f ad valorem tax as against a specific levy. The in ten tion to encourage labour- intensive p ro d u c tio n has resu lted in the d iscrim inato ry tax a­tion o f yarn as well as fabrics produced in the d ifferent sectors— the ra tes o f tax vary ing inversely w ith labour in te n ­sity . The objective o f vertical equity has led to d ifferential taxing o f the fabrics p roduced w ith in a sector, the rates differing accord ing to the yarn coun ts used in the fab ric as w ell as the price o f the fabric. I t should be no ted th a t w hen the tax is m ade to serve these various objectives, the struc tu re o f the tax gets com plicated . C onsequen tly , avenues o f evasion and avoidance open up and a ttem p ts to block these th ro u g h fu rth e r am endm ents com plicate the s tru c tu re fu rth er.

Evasion o f a tax is influenced by, am ong o th e r fac to rs , the existing s tructu re o f the tax and its evo lu tion over the years. T herefore, an understand ing o f the salient fea tu res o f the tax and its evolu tion is im p o rtan t fo r iden tify ing the avenues o f evasion. The p resen t ch ap te r highlights the salient features o f the tax structu re .

T he reference year chosen by us fo r the estim ation o f the

extent o f evasion in 1978-79. The choice o f th is year is guided m ainly by the considera tion o f the availability o f d a ta and detailed in fo rm ation on p roduction and consum ption a t the required level o f d isaggregation . Besides, the struc tu re o f the excise duty w hich underw en t a qualita tive change by being sw itched over to graded telescopic ad valorem ra tes in 1977- 78, d id no t undergo any significant qualita tive changes thereafter and the degree o f evasion estim ated fo r this year w ould therefo re be taken to be indicative o f the relative m agnitude o f evasion in m ore recen t years.

I t is necessary to m ention a t the ou tse t th a t o u r prim ary in terest is to estim ate the extent o f evasion o f excise duty on co tton clo th . T herefore, we in tend in th is ch ap te r to h igh­ligh t the salient features o f the s tru c tu re o f excise d u ty on co tto n clo th . N evertheless, in the course o f o u r analysis, we will identify certa in obvious m ethods o f evasion o f the du ty on co tton yarn and th is evasion can be easily quantified . F o r th is reason , it would be necessary to give a b rie f back­ground o f the du ty stru c tu re in reg ard to c o tto n y a m also. A gain, here we cover only the salient features o f th e tax s tru c tu re in 1978-79 and its evolu tion th ere to . A deta iled accoun t o f the evo lu tion o f the excise duties on co tto n c lo th to da te and th e ir p resen t s tru c tu re is given in A ppendix I.

Inter-Flow s between D ifferent Sectors of the T extile Industry

In order to locate the m ajor avenue o f evasion, it is necessary to u n d erstan d the in ter-linkages am ong the diffe­ren t sectors o f the textile industry and to identify the different po in ts o f levy. The m anufactu re o f co tto n cloth involves three m ain stages, nam ely, (i) sp inn ing o f yarn from co tto n , (ii) w eaving o f the yarn in to grey clo th and (iii) processing and finishing o f the grey clo th . W hile spinning is done by spinning and com posite m ills, w eaving into grey clo th is done by com posite m ills, pow erloom s an d handloom s. P rocessing and finishing o f the fabrics is done by com posite m ills as w ell as in d ep en d en t processing u n its run e ither w ith the a id o f pow er or steam o r m anually .

T he d irection o f in p u t-o u tp u t flows accord ing to types

FLOW DIAGRAM I

Manufacturing Stages and Types of Units

Cotton/Other man-made fibres

iSpinning*

44* 1 " X,

Spinning Mills Composite Mills

ICotton/Blended Yam

iWeaving

*I ■A* 4*

Composite Mills Power looms Handlooms

iGrey Fabrics

iProcessing and

Finishing *

4- 4- ♦Composite mills Independent Independent

Power Processors Hand Processors

IFinished Fabrics

IEx-factory Clearance

*Handspinmng done for the production of Khadi Cloth is ignored here.

F L O W D IA G R A M II

E /D C E /D C

K ey: D C — D u ty -p a id c le a ra n ceN D C — N o n -d u ty c le a ra n c e u n d e r b o n d E = E x em p ted .

o f mills and the in terlinkages am ong the different sectors o f the textiles industry a longw ith the po in ts o f levy o f excise duty are show n in the flow d iagram s I and II. I t is seen th a t the yarn produced in spinning mills is w oven in com posite m ills, pow erloom s as well as handloom s. Sim ilarly , the yarn p roduced in the com posite m ills is w oven in hand loom s and pow erloom s besides com posite mills them selves. A gain, all w oven clo th can be processed in com posite mills or indepen­dent processing units run e ither w ith the aid o f pow er or steam or m anually . I t is thus seen th a t there is a tw o-w ay flow betw een the organised m ill sector and the decentralised w eaving and processing sector.

Evolution of Excise Duties on Yarn and Cotton Fabrics

The excise duty on y arn , in troduced in 1961, w as a simple levy. The yarn used in all sound fabrics w as taxed a t a single ra te bu t the yarn used in fen ts w as charged a t tw o different ra te s1, one ra te (R s 0 .15/kg.) applicable to yarn used in the m an u fac tu re o f superfine and fine fabrics an d a n o th e r (0.10/kg.) on the rem ain ing . Y arn in hank form , how ever, was exem pted. Since then several changes have taken place, increasing the d ifferen tia tion in the tax rates.

Tw o fea tu res o f the levy on co tto n yarn as existing in 1978-79 a re im p o rta n t from o u r p o in t o f view . F irs t, the labour-in tensive handloom sector w as sough t to be en co u rag ­ed by exem pting co tto n yarn in h ank form on the p resum p­tion th a t th is is necessarily used only in the handloom s. H ow ever, the beneficiary o f this policy has tu rned ou t to be largely the pow erloom sector. It is know n th a t the p ow er­loom s do weave som e item s such as ‘sarees’ and ‘d h o tis ’ from yarn received in h an k form (A nand , 1979). Besides, pow erloom s a re know n to pu rchase sizeable qu an tities o f h an k yarn and rew ind it in to cones or p irns in o rder to evade excise duty on yarn (Jain , L .C ., 1983).

The second im p o rta n t fea tu re o f the excise duty on yarn was its d ifferen tia ted rates (A nnexure I). The ra te s truc tu re

1 For the definition of Fents and Rags, see Appendix I.

prevailing in 1978-79 is sum m arised in Table A .l in the A nnexure. P rogressiv ity in the s tru c tu re was sough t to be b rough t abou t by levying h igher ra tes o f tax on h igher counts o f y arn . As the conversion o f yarn from hanks in to cones o r p irn s, n o ted in the previous paragraph , involves a cost, it becom es econom ical to do so only for yarns o f higher counts and, thus, diversion o f the yarn and consequent evasion o f the d u ty was beneficial only in respect o f higher coun ts o f yarn . A no ther im p o rtan t consequence o f th is was the tendency o f the sp inning mills, in o rder to avoid h igher taxes, to spin low er counts o f yarn even th ough they could spin h igher coun ts from long-staple co tto n . One im p o rtan t fea tu re , no ted in the previous ch ap te r, th a t is, the yarn o u tp u t o f h igher counts n o t increasing p ro p o rtiona te ly w ith the long-stap le co tto n used in th e ir m anufactu re , can thus be a ttrib u ted to the excise policy. I t m ay be n o ted th a t this resu lts in low er c lo th o u tp u t as the yield o f c lo th per k ilo ­gram o f yarn is low er fo r low er coun ts o f yarn .

In the p o s t-1947 e ra the excise du ty o n co tton fabrics has been im posed since 1949 u n d er the T ariff item N o . 19. In itia lly , the tax applied only to superfine clo th , bu t soon, fine, m edium and coarse c lo th w ere also b rough t w ith in the excise n e t, a lbe it a t low er ra te s . T he levy o f hand loom cess since 1953 and add itional excise du ties in lieu o f sales tax from 1957 w ere o ther im p o rtan t developm ents in th e field o f excise policy on co tto n fabrics. A num ber o f changes in the ra te s tru c tu re w ere m ade since then , the m ost im p o rtan t one in 1976 when the basic du ties w ere changed from specific to a d valorem rates. A n o th e r im p o rtan t change was in troduced in 1977 w hen b o th th e ta riff descrip tion and duty structu re were a ltered .

A n o th e r a spec t o f the evo lu tion o f the excise on co tton fabrics is the in te r-sec to ral d iscrim ination . F o r exam ple, from 1955, small pow erloom un its w ere subjected to only a com pounded levy. Since then , the rate has been a ltered a num ber o f tim es. W ith effect from 1977, even th is was abolished on all au tho rised pow erloom s and all grey fabrics produced on pow erloom s w ere exem pted. A gain, grey fabrics produced on hand loom s have continued to be exem pt and

a lthough the ta riff descrip tion in 1960 w as am ended to include them , they were exem pted th ro u g h a separate n o ti­fication.

As m entioned in the preceding p arag rap h s, no tab le changes in the ta r iff s truc tu re were m ade in 1977. The sa lien t featu res o f the s tru c tu re o f excise on co tto n fabrics prevailing in 1978-79 are sum m arised below:

F o r the purpose o f the C en tra l Excise Tariff, ‘co tton fabrics’ were defined so as to include all varie ties o f fabrics w here co tton p redom inated by w eight and con ta ined m ore th an 40 p er cent by w eight o f co tto n and 50 p er cen t o r m ore by w eight o f non-cellu losic fibres o r yarn o r bo th . In the case o f fabrics such as em broidery in piece and fabrics im pregnated and coated , these percentages referred to the base fabrics.

C o tto n fabrics were d iv ided in to th ree categories, for w hich s ta tu to ry ra tes were fixed. A ccordingly, the basic ra tes ranged from 20 to 30 p er cent 2. H ow ever, these rates rep resen ted only the ceiling ra tes and the ac tu a l tax rates w ere governed by the effective rates notified by the G o v ern ­m ent from tim e to tim e.

The ra te s tru c tu re prevailing in 1978-79 in the m ill, the pow erloom and the hand loom sectors is ou tlined in Table 3.1. T hree im p o rtan t featu res o f the tax structu re are re levant fo r o u r purposes and hence, m ay be no ted . F irs t, d iscrim i­nato ry ra tes o f tax a tio n o f the fabrics produced in different sectors w ere im posed. Second, d ifferentiation in the ra te struc­tu re was m ade to depend upon both the yarn counts used in the m anufactu re o f the fabric, as well as the price o f the fabric. T h ird , differential ra tes o f tax were levied on the fabrics term ed as ‘sounds’, ‘fen ts’ and ‘rag s’. These featu res have im p o rtan t im plications for the m ethod and quan tum o f evasion and hence call fo r fu rth e r e labo ra tion .

The policy o f encouraging labour-in tensive technology has resulted in the levying o f d iscrim inato ry ra tes o f taxation on the p ro d u c ts o f m ill, pow erloom and hand loom sectors.

2 Since 1980, the number of categories has been increased to four.

The ra te s o f tax levied w ere inversely re la ted to the labour- in tensity in p ro d u c tio n . Thus, while p roduc ts o f the mill sector w ere subjected to the highest tax rates, the o u tp u t o f the pow erloom and hand loom sectors processed by the com posite mills o r independen t processors w ere subjected to low er ra tes, the rates being low er by 30 per cent subject to a m axim um reduction o f 3 percen tage po in ts and 60 per cent subject to m axim um reduction o f 6 percentage po in ts , respec­tively. The grey fabrics p roduced in bo th au thorised pow er­loom s and hand loom s were com pletely exem pted. Even the processed fabrics o f these secto rs were exem pted if they w ere processed by independen t hand processors no t using e lec tri­city o r steam .

TABLE 3.1

Rates of Excise Duty on Cotton Fabrics Sector-wise (1978-79)(Per cent)

Handloom Fabrics Powerloom

SI. Description Mill Processed by indepen- fabricsNo. made dent processors processed

Approved Not appro- by inde- by Govt, ved by pendent

Govt. processors

1. Cotton Fabrics (includ­ing fents and rags) in which the average count of yarn is 41s or more

15

2. Cotton Fabrics (other than those in which the average count of yarn is 41s or more)* whose value per square metre:

(a) Does not exceed Rs 4

(b) Exceeds Rs 4 but does not exceed Rs 6

5 without printing or dyeing or both

9 with printing or dyeing or both

0.80

1.20

12 12

1.40

2.10

1.40

2.10

(Table 31 Contd.)(c) Exceeds Rs 6 but does

not exceed Rs 7 4 1.60 2.80 2.80(d) Exceeds Rs 7 but does

not exceed Rs 8 6 2.40 4.20 4.20(e) Exceeds Rs 8 but does

not exceed Rs 9 8 3.20 5.60 5.60(f) Exceeds Rs 9 but does

not exceed Rs 10 10 4.00 7.00 7.00(g) Exceeds Rs 10 but does

not exceed Rs 11 12 6.00 9.00 9.00(h) Exceeds Rs 11 but does

not exceed R s 12 14 8.00 11.00 11.00(i) Exceeds Rs 12 15 9.00 12 00 12.00

3. Fents and rags with average count of yarn less than 41 s whose value per square metre:(a) Does not exceed Rs 4 2 0.80 1.40(b) Exceeds Rs 4 but does

not exceed Rs 7 3 1.20 2.10 2.10(c) Exceeds Rs 7 but does 6 2.40 4.20 4.20

not exceed Rs. 9 (d) Exceeds Rs 9 but does

not exceed Rs 12 10 4.20 7.00 7.00(e) Exceeds Rs 12 15 9.00 12.00 12.00

Notes:* Cotton fabrics o f this group when classified under ‘controlled d o th ’

variety, are subject to a tax rate reduced by 50 per cent.• • I n the budget proposal effective from 1.3.1979 the duty was increa-

led from 8 per cent to 12 per cent. It was subsequently reduced to11 per cent with effect from 24.4.1979.(i) The effective rate on further processing of duty-paid fabrics o f

composite mills (both for less than and more than 41 counts groups) is less of tax already paid.

(ii) Handloom fabrics processed by registered handloom cooperat­ive societies and hand processors not using power or steam are exempted from paying duty.

(iii) The above effective rates of duty on cotton fabrics are composite ones representing basic and additional duty in lieu of sales tax. The allocation between basic and additional duty is 75 per cent and 25 per cent, respectively.

(tv) In addition to the above, there is a special excise duty of 5 per cent on basic duty effective from 1.3.1978 and additional excise duty at 10 per cent of basic duty effective from 4:10.1978.

(v) For handloom fabrics processed by independent power processors not approved by Government and powerloom fabrics processed by independent power processors, there was a concessional rate of duty on processing (i.e., bleaching) without printing or dyeing or both of 8 per cent ad valorem vide notification No. 226/77 dated 15.7.1977. This concession has been withdrawn through the 1979-80 budget vide notification No. 60/79 dated 1.3.1979.

Sources: 1. Government of India, Ministry of Finance, Department of Revenue, Report o f Expert Committee on tax masures to pro­mote employment, 1980, New Delhi.

2. Cencus Publications, Cencus Central Excise Tariff, 1978-79, New Delhi.

The pursuance o f the objective o f equity has resulted in the taxing o f fabrics o f d ifferent qualities a t d ifferent ra tes. The quality differences in fabrics were m easured th ro u g h tw o d ifferent ind ica to rs, the yarn coun t and the price o f the fabric. D ifferent ra tes o f tax were levied on fabrics o f 41 coun ts and above, and below 41 counts 3. On fabrics o f below 41 counts, again, d ifferent tax ra tes w ere levied depend­ing u p o n the price per sq. m etre o f the fabric. T hus, fo r exam ple, mill fabrics o f over 41 counts, irrespective o f the price, were subjected to 15 per cent basic du ty and those o f less than 41 counts w ere subjected to varying ra te s o f duty depending upon the price o f the fabric, subject to a m axi­m um basic ra te o f 15 per cent. T his did indeed create an anom aly in th a t fabrics o f h igher counts were subjected to the highest ra te o f taxation , irrespective o f the price o f the fabric and the econom ic status o f the consum er.

A no ther im p o rtan t fea tu re o f the tax s truc tu re is the d ifferential taxation o f ‘so unds’, fen ts’ and ‘rags’. The tax ra tes on fabrics o f higher counts were the sam e for all the th ree categories. H ow ever, fents and rags o f low er counts were charged a t slightly low er rates, although the range o f the tax rates w as the sam e (2 per cent to 15 per cent).

8 Since 15.7.1982, the distinction is made between 51 counts and above and below 51 counts.

Implications of the Structure of E xcise—Possible Avenues of Evasion

T he in ter-sec to ral and in tra -sec to ra l d ifferen tia tion in the exem ptions and the ra tes o f tax on yarn as well as fabrics have im p o rtan t im plications fo r the m ethod and quan tum o f evasion o f excise duty . In this section, we a ttem p t to explore this aspect.

W e had m entioned in C h ap te r 1, th a t evasion o f a tax is a function of, am ong o ther fac to rs, the p robab ility o f de tec t­ion. Thus, a taxpayer w ould em ploy those m ethods o f evas­ion w hich have low probabilities o f being detected. This would im ply th a t there are no s tan d ard m ethods o f evading taxes on all com m odities and the m ethods em ployed in re la t­ion to each com m odity w ould differ depending upon the s tru c tu re o f the tax, the p ro d u c tio n p a tte rn and trade channels o f the com m odity in question-

The s tru c tu re o f excise on c o tto n textile fabrics and the p roduction p a tte rn o f the com m odity w ould indicate the follow ing m ajo r m ethods o f evasion: Evasion th rough(i) in te r-sec to ral m isclassification o f the o u tp u t and (ii) in ­tra -sec to ral m isclassification w hich also involves understa te­m ents o f p ro d u ctio n and under-valuation .

The existence o f in ter-sec to ral ra te d iffeiences could provide avenues o f evasion th ro u g h in te r-sec to ra l m isclassi­fication o f the o u tp u t. I t may be difficult to m isclassify the o u tp u t o f the mill sector, fo r, it being an organised sector, evasion by th is m eans has a higher p robab ility o f being de­tec ted . O n the o ther hand , m isclassification o f pow erloom o u tp u t as handloom o u tp u t can be done w ith less fear o f detection , for it is no t possible to m on ito r p roduction flows in un its in the decentralised sector. F u rth e r, n o t much in form ation is available even to the au th o ritie s on the o u tp u t o f pow erloom s and handloom s; estim ates o f th e ir p roduction figures are based m ainly on yarn deliveries, hank y a rn being taken to be en tire ly used in the handloom s. G iven th a t hank yarn is exem pt from the excise du ty , evasion o f the tax by rew inding hank y a rn in to cones o r pirns and using them in pow erloom s w ould be beneficial so long as the du ty evaded

exceeds the cost o f rew inding. As higer ra tes o f du ty are levied on h igher counts o f yarn , th is is specifically viable for yarn counts h igher than 404. T hus, in the process o f evading the d u ty on yarn , pow erloom o u tp u t is m isclassified as handloom o u tp u t.

A n o th er in ter-sec to ral avenue o f evasion o f the tax arises from the m isclassification o f pow erloom fabrics processed by independent processors using pow er, as hand-processed fabric. I t may be recalled th a t the hand-processed pow erloom fabrics are exem pted from the excise duty w hereas those p ro ­cessed w ith use o f pow er are required to pay the tax—the ra tes ranging from 1.4 per cen t to 12 per cent. G iven the unorgan ised n a tu re o f the industry , it may no t be difficult to m isdeclare the pow er-processed fabrics as hand-processed and claim exem ptions. I t should be no ted th a t the hand- processing m achinery is by no m eans unsoph isticated— ra ther, it is identical to the pow er-processing m achines and hence, the p roducts w ould n o t be different. Each unit p ro ­cesses abou t 20,000 m etres o f clo th per day (G overnm ent o f India, 1980b) It is com m on know ledge th a t in some places hand-processing and pow er-processing units do o pera te in ad jacen t sheds in benami nam es, m aking it easier to indulge in m isdeclaration. We have also heard often th a t the same un it is run on pow er usually, bu t is m anually opera ted at the tim e o f inspection . A gain, the struc tu re o f tax rates provides g rea te r incentive fo r the evasion o f tax on the fabrics o f higher coun ts as the tax ra te s are h igher on them .

G iven the s truc tu re o f excise du ties, we can trace an o p ti­m al pa th o f excise evasion w herein a producei can evade the tax, th ro u g h o u t the p roduction flow, bo th on the yarn and on the c lo th . A p ro d u cer can purchase h an k yarn w hich is exem pted, rew ind it in to cones or p irns and weave it on the pow erloom s. G rey cloth produced by the pow erloom s is exem pt. This grey clo th could be processed in independen t

* The Mill Owners Association (1982) contends that the cost of re­winding hank yarn into cones is around Rs 1 to 2 per kg of yarn. As the excise duty on yarn of 40 counts is Rs 1.63 per kg., convers­ion becomes economical for yarn of counts higher than 40.

hand-processing u n its w hereby the du ty is avoided . H ow ­ever, w hen it is p rocessed in pow er processing units and mis- classified as hand-processed, duty is evaded. N o w , the p ro ­ducer stam ps a nam e and trad e m ark o f a repu ted m ill, an inflated ex-mill p rice on the clo th and the excise du ty payable and sells it to the consum ers.

H ow ever, evading o f the tax in the way m entioned above requ ires coo rd ina tion o f the activ ities o f d ifferen t sectors o f the textile industry . In o ther w ords, the pow erloom ow ners m ay n o t stand to gain directly from the evasion o f the tax a t the processing stage. S im ilarly, tax evasion a t the spinning stage m ay n o t be directly beneficial to independent proce­ssors. It is in th is con tex t th a t we have to und erstan d the ro le o f the traders.

T raders occupy a p ro m in en t place in a lm ost all the ac ti­vities o f textile m anufactu ring . M any a tim e, they a re in s tru ­m ental in coo rd in a tin g all the activ ities subsequent to sp in ­ning. They buy the h ank y arn , rew ind it in to cones o r p irns by paying ap p ro p ria te charges, w eave it in pow erloom s by paying a ren tal to the pow erloom ow ner and p rocess them in independen t processing units. Subsequenty, they illicitly stam p an inflated price as well as the trade m ark o f a reputed m ill on the cloth and sell it th ro u g h w holesale and re ta il o u t­lets.

Evasion a rising ou t o f the in tra -sec to ra l tax ra te differen­tial can be classified under tw o categories, nam ely , (i) sup­pression o f quan tity o f c lo th p roduced in a sector and (ii) u n d erva lua tion o f the clo th produced. U nder the la tte r, we m ay include the m isclassification o f the higher priced categories as th o se belonging to low er price categories, m isclassification o f the coun t o f yarn used, m isclassification o f sound fabrics as fen ts o r rags, tie-in-sales and such o ther m ethods usually em ployed in the trad e to evade taxes (G o v ­ernm ent o f In d ia . 1976).

A lthough it is possib le, it m ay no t be very p robab le th a t the mill sector evades taxes by suppressing the q u an tity o f o u tp u t. The organised na tu re o f the mill sector and the co nstan t m onito ring o f the p rodu c tio n flows, from the co tton

used to the c lo th produced , by the excise officials m akes it difficult to evade taxes by suppressing the ou tp u t w ithou t the connivance o f the officials. In o ther w ords, the probab ility o f getting detected by suppressing o u tp u t w ould be h igh and therefo re , use o f this m ethod to evade taxes may n o t be fre­quen t. O n the co n tra ry , given the g raded n a tu re o f the tax s tru c tu re , the evasion o f the tax th rough undervaluation could be sizeable. As the ra tes vary w ith the coun t o f the fabric and its price if the fabric is o f less than 41 coun ts, m isclassification am ong the coun t groups is n o t difficult (because it m ay n o t be possib le to subject all the fabrics to labo ra to ry tests). S im ilarly, excise officials may no t be able to m o n ito r the evasion arising from the tie-in-sales an d m is­classification o f higher p riced item s in to low er priced cate­gories. Even d irect u n d erv a lu a tio n may escape the a tten tion o f the officials as it may n o t be possible to m onito r the en tire d istribu tive flow s. In any case, the m ethod and the quan tu m o f tax evasion in re la tion to textile fabrics is basically an em pirical issue w hich we deal w ith in the next chapter.

We have highlighted the salient features o f the tax struc­tu re prevailing in 1978-79, w hich is the reference year fo r estim ated evasion o f the tax. Since 1978-79, there have no t been any q u a lita tiv e changes in the s tru c tu re o f the tax. The s truc tu re con tinues to be a graded one although the cu t-off p o in t fo r ra te d iffe ren tia tion w as changed from 41 coun ts to 51 coun ts in 1980-81. The fabrics o f less th an 51 counts again have a d ifferen tia l ra te s truc tu re depending upon the th e price. As there have n o t been significant qualita tive changes in th e tax struc tu re , it need n o t be app rehended th a t the m ethods and the re la tive m agnitude o f evasion estim ated by us fo r 1978-79 w ould be d rastically d ifferent from w hat they are now .

4

Excise Duty Evasion—An Empirical Estimate

Introduction

In the prev ious chap ter, we have explained th a t in tersec­toral and in tra-sectoral differences in exem ptions an d the s tructu re o f ra tes lead to evasion o f the excise duty on co tto n textile fabrics. In te r-sec to ral tax differences cause evasion o f the yarn duty th ro u g h m isclassification o f the y a rn used by pow erloom s as yarn used by hand loom s. Besides, this causes evasion o f the du ty on clo th also, as the pow erloom cloth p ro ­cessed using p ow er can be misclassified as hand-processed. In tra -sec to ra l tax ra te differences m ay cause evasion o f the tax largely in the mill sector, w hen mills either understa te or undervalue th e ir o u tp u t. To estim ate the to ta l evasion o f the du ty , therefo re , we have to estim ate the evasion caused by each o f these m ethods and aggregate the ind iv idual estim ates. In this chapter, we m ake such an attem pt.

Evasion of Duty through Inter-Sectoral M isclassification

a. Evasion o f the yarn duty

We have already m entioned th a t the exem ption o f h ank yarn from excise duty leads to evasion o f the yarn du ty th ro u g h illicit rew ind ing o f h ank yarn in to cones o r p irn s and w eaving them on pow erloom s. As the rate o f duty is higher on yarn o f h igher counts, tax evasion on such yarn becom es

specially tem pting . Subsequently , as the official estim ates o f handloom and pow erloom p rodu ctio n depend on the yarn deliveries in h ank and non-hank form , respectively, due to the diversion, the official estim ate o f hand loom production is oversta ted and pow erloom p roduction estim ates are u n d er­stated . I t is com m on know ledge th a t h ank yarn is used for the w arp w hen yarn-dyed fabrics are p roduced on pow er­loom s. Besides th is, diversion o f hank yarn to pow erloom s takes place on a significant scale to take advantage o f the excise ra te differentials.

The existence o f an upw ard bias in hand loom production and the consequent dow nw ard bias in pow erloom production in the official estim ates is a w ell-know n fact. A Planning Com m ission study (A nand, 1979) places the m isclassification a t 500 m illion m etres fo r the year 1975. Ja in (1983) sim ilarly estim ates th a t 840 m illion m etres o f pow erloom cloth w ould have been misclassified as handloom cloth in 1981. The Mill O w ner’ A ssociation places the misclassified q uan tity o f clo th a t 600 m illion m etres in the year 1981. It thu s seems th a t the diversion o f h ank yarn and the consequent evasion o f yarn and the consequent evasion o f yarn du ty arising therefrom is considerable.

We can estim ate the quan tum o f yarn diversion by indep­endently estim ating the consum ption o f yarn by the hand loom s and com paring it w ith the hank yarn deliveries. In o ther w ords, i f we can estim ate the p rodu c tio n o f hand loom s in­dependently (n o t on the basis o f yarn deliveries, as is done officially), we can arrive a t the estim ate o f yarn d iversion and the am o u n t o f c lo th misclassified by com paring it w ith the officially estim ated p ro d u c tio n figure.

We have a ttem pted to estim ate the am o u n t o f yarn diver­sion and cloth m isclassification by independently estim ating the p roduction figures. An estim ate o f p ro d u c tio n can be arrived a t by adding the consum ption o f han d lo o m clo th to the exports o f such clo th . E stim ates o f household consum pt­ion o f handloom s are available in the Consumer Purchases o f Textiles, an annual pub lica tion o f the Textile C om m ittee, M arke t R esearch W ing, M inistry o f C om m erce, G overnm ent o f India. We have ad justed the calendar year d a ta given in

th is pub lication p ro p o rtio n a te ly to correspond to the fiscal year 1978-79. S im ilarly, ad justm en ts had to be m ade in the reported export figures also , for, a lthough d a ta on the export o f hand loom clo th are available in b o th q u an tities and values, d a ta on the export o f handloom m anufactu res a re available only in value term s. A ssum ing the price per m etre o f the la tte r, we have estim ated the quan tity o f h and loom m an u ­fac tu res.

The estim ated m isclassification o f yarn is p resen ted in Table 4.1. I t is seen th a t to ta l household consum ption o f handloom c o tto n cloth in 1978-79 am ounted to 962.59 m illion m etres. Consumer Purchases o f Textiles (G overnm en t o f In d ia , 1978, 1979) gives us the estim ated n o n-househo ld co n ­sum ption o f c o tto n fabrics, bu t the hand loom com ponen t is no t separately available. H ow ever, the P lann ing C om m ission 's study (A nand , 1979) estim ates non-household consum ption o f handloom for the year 1975 a t 300 m illion m etres w hich in th a t year form ed 63.5 per cen t o f to ta l non-househo ld co n ­sum ption (In s titu tio n a l Purchases). A ssum ing the p ro p o rt­ion to rem ain the sam e in 1978-79, we have estim ated the non-househo ld consum ption o f hand loom in the year at 520.19 m illion m etres. The estim ated to ta l consum ption o f handloom in 1978-79, thus, is placed a t 1482.78 million m etres.

TABLE 4.1

Estim ated Production of Handloom Cloth (1978-79)

Household consumptionNon-household consumptionExport of handloom clothExport of handloom clothmanufactures (value of Rs 28.91 crore at therate of Rs 7.42 per metre)

962.59 mn. metres 520.J9 mn. metres 84.60 d i d . metres 38.95 mn. metres

Total Estimated Production 1606.33 mn. metres

D uring the year, the export o f hand loom co tton c lo th w as84.6 m illion m etres having a value o f Rs 628 m illion. Besides this, hand loom m anufactu res w orth Rs 289.1 m illion were also exported . I f the price per m etre o f c lo th o f the form er (Rs 7.42) is assum ed, the exported q u an tity o f co tton m an u ­factures w ould am oun t to 38.95 m illion m etres.

By adding the estim ated consum ption to estim ated exports, we get an estim ate o f the p roduction o f c lo th , w hich comes to 1606.33 m illion m etres fo r the year 1978-79. E stim ation m ade on the basis o f hank yarn deliveries, how ever, places handloom p roduction a t 2119.23 m illion m etres, as m a y b e seen from Table 4.2. T hus, 512.91 m illion m etres o f p o w er­loom cloth seem to have been misclassified as hand loom clo th .

T o arrive a t the exact am o u n t o f du ty loss due to yarn d iversion, w e have to estim ate the d iversion o f clo th and yarn o f various counts. H ow ever, certa in assum ptions are called fo r as the d a ta in the required d isaggregation are n o t available. W e have assum ed th a t there w ould be no m isclassi­fication o f c lo th th ro u g h the d iversion o f yarn fo r c lo th up to 20 counts because fo r such clo th , the cost o f rew inding the yarn w ould far exceed the benefit from excise evasion. F u rth e r, it is assum ed th a t the m isclassification o f c lo th o f the rem ain ­ing co u n t g roups w ould be p ro p o rtio n a l to the estim ated p ro ­duction o f clo th (derived on the basis o f yarn deliveries)1. By applying an a p p ro p ria te c lo th -yarn conversion ra tio to the misclassified clo th p ro d u c tio n estim ates we have o b ta ined an estim ate o f yarn diversion in different coun t g roups (Table 4 .2). By applying ap p ro p ria te ra tes o f duty on the diverted yarn , the am o u n t o f du ty evaded can easily be derived. As seen in the table, the duty thus evaded am oun ts to Rs 6.92 crore , ab o u t 8 per cent o f the ac tu a l collections2. C ollection

1 It may be mentioned that this is an assumption which leads to a very conservative estimate of evasion, for, given the structure of excise duty the diversion of yarn would be disproportionately higher for higher count categories. But, as we do not have reliable estimates on this, we have made this conservative assumption.2 Here, it may be noted that the actual collection in a year consists of the duty paid for that year plus the previous year’s arrears collected in the year. It does not include duty liability not discharged during the year.

Estimate of Yarn Diversion and Evasion o f Duty (1978-79)

Count Hank yarn Cloth Estimate Our Misclassi- Estimated Average Amount o f Evasiongroups deliveries produ- of cloth estimate fied produ­ yarn basic Basic Special Total

(in thous­ ceable produc­ of cloth ction1 diversion duty (Rsand kgs.) per kg. tion on produ­ (million (million (paise/ millions)

of yarn the basis ction metres) kgs.) kgs.)of yarn (milliondeliveries metres)(millionmetres)

(i) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

1 - 10s 54673.50 8 437.39 437.39 0 0 __ 0 0 011 — 20s 72994.25 8 583.95 583.95 0 0 -- 0 0 021 - 30s 26991.75 10 269.92 143.82 126.10 12.61 43.25 5.45 0.27 5.72

31 — 40s 36633.75 10 366 34 195.20 171.14 17.11 88.00 15.06 0.75 15.8141 — 60s 20061.75 15 300.9. 160.34 140.59 9.37 234.25 21.95 1.10 23.05

242 BVASION

OF Excise

DUTIES IN

INDIA: STUDY

OF COTTON

TEXTILE FABRICS

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) OD

61 — 80s 7649.75 15 114.75 61.14 53.61 3.57 387.75 13.84 0.69 14.53Above 80s 3064.25 15 45.96 24.49 21.47 1.43 668.00 9.55 0.48 10.03

TOTAL 222069.00 2119.23 1606.33 512.91 44.09 65.86 3.29 69.15

Motes : 1 We have assumed that the yam of upto 20 counts will not be diverted and hence our estimates and the estimates based on yarn deliveries do not differ for cloth of upto 20 counts. The remaining portion o f our estimates has been distributed among the different count groups in proportion to the estimated production of do tb of different counts derived from yarn delivery figures.

2. Figures in column 2 which represent hank yarn delivery according to the fiscal year 1978-79 are adjusted from the calendar year data given in the Indian Cotton Mills Federation, Handbook o f Statistics on Cotton Textile Industry, Bombay.

3. The information on cloth produceable per kg. o f yarn given in column 3 is taken from Mazumdar (1984).

o f this am oun t w ould have resulted in the to ta l excise collect­ion from yarn o f Rs 94.79 crore and evasion on th is accoun t as a p ro p o rtio n o f the to ta l w orks ou t to 7.3 per cent.

b. Evasion o f duty on cloth

As stated earlier, the d iversion o f h an k yarn to evade yam duty also results in th e evasion o f the du ty on clo th . We have a lready estim ated above th a t abou t 513 m illion m etres o f pow erloom clo th were m isclassified as h and loom clo th in 1978-79. There is no reason to expect th a t excise du ty would have been paid on th is c lo th .

Basically, evasion o f the clo th du ty can be included in a m ore general fo rm o f evasion-m isclassifying pow er-processed fabrics as hand-processed . It should be no ted th a t the grey fabrics produced on pow erloom s were exem pted from excise du ty . A gain, even on the processed fabrics, the d u ty was no t leviable i f the clo th w as processed w ith o u t the a id o f p o w er o r steam . D uty on pow erloom fabrics, thus, w as leviable only if the c lo th was processed in the pow er processors. This, as we have a lready m entioned in the p rev ious chap ter, leads to m isclassification o f very sizeable am oun ts o f pow er-pro- cessed fabrics as hand-processed and hence, the evasion o f the duty .

We do n o t have any reliable estim ate o f the m isclassificat­ion o f pow erloom cloth processed by processors using pow er o r steam as having been hand-processed. The M ill O w ners A ssociation feels th a t o f ab o u t 4500 m illion m etres o f cloth p roduced in the pow erloom sector, as m uch as 2000 m illion m etres could have been thus m isclassified. We do n o t know on w h a t basis this estim ate has been a rriv ed at; hence it is n o t possible to judge its reliability . N o r are we able to present a lte rn a tiv e estim ates o f m isclassification o f c lo th and co n ­sequen t loss o f revenue fo r w an t o f sufficient in fo rm ation on the unorganised clo th-processing in dustry . N evertheless, we w ould like to em phasise th a t the quan tum o f m isclassification could be substan tia l and the am o u n t o f duty thus evaded could be sizeable.

We have, in ou r analysis, assum ed th a t excise d u ty on the

pow erloom cloth m isclassified as hand loom clo th could be the m inim um th a t w ould escape the tax net. I t is no t very obvious th a t excise d u ty w ould be necessarily evaded on all misclassified cloth. Also, it is no t necessary th a t pow erloom cloth misclassified as hand loom cloth should be processed in independen t processing un its using pow er b u t m isclassified as hand-processed. I t is here th a t the crucial ro le o f the trader com es to the fore. T he trad e r coo rd inates the activities a t all stages. G iven the fac t th a t the misclassified cloth is m ade o f yarn o f higher coun ts w hich basically is in tended to com ­pete w ith the m ill fabrics, we m ay presum e th a t this w ould be processed in m echanically opera ted un its em ploying m odern m achinery w hich w ould necessarily use electricity. F u rth e r, given the relative ease o f m isclassifying pow er-processed fabrics as hand-processed , there is no reason w hy the trader- m anufactu rer w ould no t re so rt to th is. T hus, there is no reason to believe th a t excise du ty w ould have been paid on the misclassified c lo th even though it w ould have been p ro ­cessed w ith the aid o f pow er o r steam . This could a t least be taken as the m inim um th a t w ould escape the tax net, a lthough in actuality , the am o u n t o f evasion on this account would surely be substan tia lly higher.

To estim ate the evasion arising from the m isclassification o f clo th , we requ ire d a ta on the value o f clo th o f m ore th an 41 counts and less th an 41 counts, the la tte r again disaggreg­ated in to relevant price ranges. To arrive a t this, we need tw o sets o f in fo rm ation , nam ely,

(i) prices o f pow erloom clo th o f various count groups; and

(ii) d istribu tion o f the pow erloom cloth o f less th an 41 counts in term s o f price ranges m atch ing w ith the tax ra te categories.

We have som e in fo rm ation on the prices o f pow erloom cloth averaged fo r coarse, m edium A, m edium B, fine and superfine fabrics, ob ta ined from the R ep o rt o f the C om m ittee on Tax M easures to P rom ote E m ploym ent (G overnm ent o f Ind ia , 1980). The la tte r fou r g roups correspond to the count g roups o f 21 to 30, 31 to 40, 41 to 60 and above 60 and ,

therefore, the value o f fabrics in different coun t groups can be estim ated. But in fo rm ation on the d istribu tion in term s o f price ranges o f pow erloom cloth o f less th an 41 counts is no t available. We have, therefore , used the in fo rm ation contained in the m em orandum subm itted by the M ill O w ners A ssociat­ion to the T rip artite C om m ittee (1981) on the price range- wise break-up o f mill fabrics o f less th an 41 counts. A pplying the relevant tax rates applicable to pow erloom fabrics on the value o f fabrics o f over and less th an 41 counts disaggregated into different price ranges, we have estim ated the loss of revenue arising from the m isclassification.

The co m p u ta tio n s are detailed in Table 4.3. The aggregate loss o f duty on accoun t o f m isclassification o f the cloth am ounts to Rs 12.66 crore, the basic duty am oun ting to Rs11.00 crore and special and add itional duties am ounting to Rs 1.65 crore. These form 8.71 per cent o f the actual collec­tion o f excise duty on co tton textile fabrics.

In tra-sec to ral T ax Differences and Evasion o f Duty

Basically, evasion o f excise duty arising from the in tra ­sectoral tax differences is confined to the com posite mill sector. As m entioned earlie r, we can identify tw o broad types o f evasion under th is category, nam ely,

(i) evasion th rough suppression o r understa tem ent o f the quan tity o f clo th produced; and

(ii) evasion through undervaluation o f fabrics; un d er this, we may include, besides d irect undervaluation , m ethods such as m isclassification o f coun t groups, price groups and sounds in to fents and rags, tie-in-sales and such o th e r m ethods usually em ployed to understa te the value o f the clo th .

a. Suppression o f production and evasion o f duty

In o rd er to exam ine w h e th e r the com posite mills, in fact, indulge in large-scale suppression o f o u tp u t to evade the excise duty , we have a ttem pted to independently estim ate the yarn and c lo th p ro d u c tio n on the basis o f the availability o f

Variety Quantity of mis­classified cloth (in million metres) Linear Sq. metres metres®

Ex-factory price per sq. metre

(Rs)

Value of misclassi­fied* cloth

(Rs. million)

BasicTotal tax payable*

Additional plus special

(Rs million)

Total

(1) (2) (3) (4) (5) (6) (7)

Medium B Medium A

126.10171.14

132.38179.66

3.154.05

417.001727.62]' 21.18 3.18 24.36

FineSuperfine

140.5975.08

147.5978.82

5.553.70

819.13]291.63 f 88 86 13.33 102.19

TOTAL 512.91 538.45 2255.38 110.04 16.51 126-55

Notes: @ On the basis of a survey, we have found that the average width of the cloth is 1.0498 metres. Using this information column 2 is derived from column 1.

* Distribution of the quantity of cloth according to relevant price ranges, the corresponding tax rates and tax payable are shown in Table 4.4.

Sources: 1. For Col. (1): Table 4.2.2. For Col. (3): Government of India, Ministry of Finance, Department of Revenue, Report o f the Expert

Committee on Tax Measures to Promote Employment (1980), p. 83.

TABLE 4.4Evasion o f Excise Duty on M isclassified Cloth o f M ed-B and Med-A Varieties

Price ranges Quantity of mis­classified cloth belonging to Med-B and Med-

A categories (million sq. metres)

Value of cloth (Rs million)

Price per sq. metre

(Rs)

Tax rate applicable (basic) (percentage)

Taxpayable(basic)(Rs.million)

(1) (2) (3) (4) (5)Upto Rs 4 per sq. metre 57.29 119.84 2.09 1.4 1.64

Rs 4- 6 per sq. metre 114.21 358.38 3.14 1.4 5.02Rs 6- 7 per sq. metre 66.62 262.80 3.94 1.4 3.68Rs 7- 8 per sq. metre 30.39 138.16 4.55 2.1 2.90Rs 8 -9 per sq. metre 15.66 80.58 5.15 2.1 1.69Rs 9-10 per sq. metie 12.17 69.83 5.74 2.1 1.47Rs 10-11 per sq. metre 4.K7 30.79 6.32 2.8 0.86Rs 11-12 per sq. metre 4.34 29.99 6.91 2.8 0.84

Above Rs 12 per sq. metre 6.49 54.25 8.36 5.6 3.04TO TAL 312.04 1144.62 21.18

Notes: 1. The value of 226.41 million sq. metres o f fine and superfine cloth was estimated at Rs 1110.76 million. At 8 per cent o f basic tax rate, which is levied on these varieties of powerloom cloth, the total basic tax payable would be Rs 88 86 million.

2. While distributing the quantity and value of med-B and Med-A powerloom cloth in various price ranges, the pattern given in the memorandum submitted by the Mill Owners Association. Bombay, to the Tripartite Committee, 1982, has been followed.

248 EVASION

OF EXCISE

DUTIES IN

INDIA! STUDY

OF COTTON

TiXTlLB FABRICS

the basic raw material, namely, cotton . Applying the norm s s tipulated by the textile technologists for the conversion o f co tton into yarn and yarn into fabrics, we have estimated the a m o u n t o f yarn and fabrics th a t could, in fact, have been produced. These estimates are then com pared with the cotton and yarn consum ption figures reported in the mill sector to examine the possibility o f suppression o f yarn and cloth o u t ­p u t in this sector.

We have estimated co tton availability for sp inning as follows: P roduction estimates o f cotton are added to the net im ports ( im ports less exports) and changes in the stock of cotton to arrive a t the to ta l co tton available in the year. By adjusting this fo r o the r uses o f co tton and co tton used in hand-spinning (the p roduction o f khadi), we have estimated the co tton available for spinning and com posite mills.

In the m anufacture o f yarn from co tton , certain wastages are involved primarily due to the existence o f trash in mixing, b low room droppings, gu tte r losses, semi-high production card waste and unaccounted losses such as those arising from comber waste, sweepings, clean waste, hard waste and invisible losses. The A hm edabad Textile Industry ’s Research Association (A TIR A ) gives the norm s for wastages under each o f these heads fo r different w arp and weft count-groups o f yarn . Taking in to account these norm s we can obtain the estimates o f co tton th a t is reported to have been consumed in the mill sector. By com paring co tton availability with the reported co tton consum ption, we can estimate the quantity o f suppressed yarn.

W e can estimate the understa ted quantity o f cloth also by following a similar methodology. Applying the wastage norm s to the availability o f cotton we can o b ta in an estimate o f the yarn th a t could be produced. By making adjustments for the im port and export o f yarn , yarn deliveries to the decentralised sector and changes in stocks, we can arrive at the estimates o f yarn available to the mill sector for weaving or the yarn tha t would, in fact, have been consumed in the mill sector. Applying the w;istage involved in weaving, as per the no rm s given by the textile technologists, on the reported p roduction o f cloth in the mill sector, we can arrive

a t the e rtim ated co n sum ption o f yarn perta in ing to the repo rted p ro d u c tio n o f clo th o r the reported consum ption o f yarn . The extent o f understa tem en t o f clo th production can be estim ated on the basis o f the difference betw een yarn th a t w ould have been consum ed and th a t is reported to have been consum ed.

We have b road ly fo llow ed the m ethod explained above to exam ine w hether the mill secto r indulges in significant understa tem ent o f the quan tity o f clo th produced. To begin w ith, we considered the co tton availability for sp inning by the m ills. F o r the year 1978-79, it is estim ated th a t dom estic production plus net im ports m inus o ther uses including hand- spinning o f co tto n am ounted to 74.18 lakh bales each o f 170 k rs . As the change in stocks was o f the o rder o f 0.17 lakh bples, du ring the year, the to ta l availability w orks out to 74.35 lakh bales or 1263.95 m illion kgs.3

To estim ate the co tton th a t w ould have been consum ed to produce the repo rted quan tity o f yarn we have used the ATIRA w astage-norm s. These norm s are given for y am o f various w arp and w eft count-groups, as m ay be seen from Table 4.5. The yarn p ro duction figures, how ever, are given

in coun t-g roups different from the groups for w hich w astage norm s are available. We have assum ed th a t w astage norm s are uniform w ithin a coun t-g roup and re-estim ated the yarn rea lisa tion percentages fo r the count-groups fo r w hich yarn p roduction d a ta are available.

W hile it is easy to com pute the c o tto n consum ption required fo r the repo rted co tton yarn p roduction , estim ation o f co tton consum ption fo r the rep o rted blended yarn becom es difficult fo r w an t o f d a ta on the co tton con ten t in blended yarn. H ow ever, on the basis o f the discussion we have had w ith the textile technologists and som e m anufactu rers, we have assum ed th a t the share o f co tto n in blended yarn is

* These items of information have been taken from the Indian Cotton Mills Federation, Handbook o f Statistics. Bombay, 1983. The data given in the Handbook relate to calendar years and therefore, we have adjusted them to obtain the corresponding figures for financial

years.

TABLE 4.5Wastes and Yarn Realisation (A s Percentages o f Cotton Consumed)

Mixing Carded Combed

Warp count group (No.) 4-9 10-13 14-25 26-34 28-34 35-44 45-70 71-99 100-140Corresponding weft counts 4-9 10-13 14-29 30-39 30-38 39-49 50-79 80-109 110-140Trash in mixing* (per cent) 11.0 10.0 7.0 5.0 5.0 4.0 3.0 2.0 2.0Wastes (percent):Blowroom Droppings 12.0 11.0 7.7 5.4 5.4 4.4 3.2 2.2 2.2Gutter Loss 1.2 1.1 0.8 0.5 0.5 0.4 0.3 0.2 0.2SHP card waste** 4.2 4.2 4.4 4.5 4.5 4.3 4.3 4.4 4.4Unaccounted loss {per cent):Comber waste — — — 9.0 10.9 12.0 13.0 14.0Sweepings 2.0 1.8 1.6 1 4 1.4 1.2 1.0 1.0 1.0Cleaner waste 0.6 0.5 0.4 0.4 0.4 0.3 0.2 0.2 0 2Hard waste 0.6 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3Invisible loss 1.8 1.7 1.6 1.5 1.5 1.3 1.3 1.3 1.3

Yarn realisation (per cent) 77.6 79.2 83.1 86.0 77.0 76.9 77.4 77.4 76.4

Notes: *If trash is less by 1 per cent, yarn realisation increases by 1 per cent and vice versa.•*SHP—semi-high production cards. With high production cards, th j yarn realisation improves by about 0.4 per cent owing to about 0.5 per cent less waste extracted at cards. With tandem carding, the yarn realisa­tion is reduced by about 0.9 per cent compared to SHP cards.

Source: Ahmedabad Textile Industry’s Research Association, Norms for the Textile Industry, Ahmedabad, 1982, P.S. 28.

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35 per cen t and have estim ated the to ta l m ill consum ption o f c o tto n fo r p roducing the rep o rted q u an tity o f blended yarn in the year 1978-79.

An estim ate o f the reported consum ption o f co tton is presented in Table 4.6. I t is seen from the tab le th a t the reported to ta l consum ption o f co tton am ounts to 1243.78 m illion kgs. This estim ate com es very close to th a t o f the cotton th a t w ould have been consum ed for sp in n in g —1263.95 m illion kgs. Thus, the difference is only 20.17 m illion kgs (1.6 per cent). This o rd e r o f difference is too sm all to be definitively a ttr ib u ted to the suppression o f yarn because our assum ption o f 35 per cent o f co tto n in blended yarn may be too conservative a figure. Besides, in actuality the w astages could be h igher, a lbe it m arginally , th an the A T IR A ’s norm s on yarn rea lisa tion applied in ou r study. T hus, prim a fa c ie , there does no t ap p ear to be any significant under-repo rting o f the yarn production and hence evasion o f yarn duty on this account, i f any, seems to be negligible.

We have a ttem pted also to estim ate the ex ten t o f su p p re ­ssion o f cloth ou tp u t by the mill secto r in the year 1978-79. These com puta tions are de tailed in Table 4.7 and largely these are self-explanatory. G iven th a t th e suppression o f yarn ou tp u t is negligible, by m erely add ing the repo rted co tton yarn co n sum ption to changes in stocks, we can arrive a t the estim ated yarn th a t w ould been consum ed in the mill sector. By apply ing the norm s o f loss involved in converting yarn in to clo th , we can arrive a t the possible c lo th o u tp u t from yarn availability and com pare i t w ith the rep o rted clo th ou tpu t. A lternatively , we can derive the actual yarn consum p­tion from the repo rted clo th p ro duc tion and com pare it w ith the yarn availability estim ates to q u an tify the suppression o f c lo th o u tp u t in the mill sector.

To estim ate the expected yarn consum ption fo r p roducing the repo rted co tton clo th , it is necessary to convert the q u a n ­tity figures given in term s o f m etres in to kgs. A N atio n a l P roductiv ity C ouncil study (1976) gives the equivalen ts o f these collected from the Ind ian C o tto n M ills F edera tion fo r various qualities o f fabrics. U sing these equivalen ts and assum ing the co tton co n ten t o f blended clo th a t 35 per cent,

Expected Consumption of Cotton in Spinning and Composite M ills (1978-79)

Count-group

Production of yarn

Yarn realisa- Expected consum- tion* (percentage) ption of cotton

Total cotton consumption

of yarn Cotton Blended Cotton Blended**(million kgs.' Yarn Yarn

(Million kgs.)

(1) (2) (3) (4) (5) (6) (7)

1 — 10s 130.75 1.50 76.60 133.70 0.68 134.3811 — 20s 274.50 14.75 81.90 335.16 6.30 341.4621 - 30s 233.00 48.00 84.80 275.74 19.88 295.6231 — 40s 205.25 83.50 77.00 266.56 37.96 304.5241 - 60s 63.75 45.75 77.00 82.79 20.79 103.5861 — 80s 27.25 17.00 77.00 35.06 7.84 42.90

Above 80s 14.75 4.75 77.00 19.16 2.16 21.32

TOTAL 922.00 922.00 215.50 1148.17 95.61 1243.78

Memorandum items:1. Availability of cotton for mill consumption 1263. 95mn, kgs,2. Reported cotton consumption by the mill sector

derived on the basis of the yarn produced : 1243. 78mn. kgs.

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3. Difference 20. 17mn. kgs.

•Based on the norms of Ahmedabad Textile Industry’s Research Association (1982).

*‘ Assuming that the cotton component in blended yarn is 35 per cent. This consists of production available for mill sector consumption (74.18 lakh bales of 170 kgs. each) and changes in stock (0.17 lakh bales of 170 kgs. each).

Source: For Cols. (2) and (3) : Government of India,Ministry of Commerce, Office of the Textile Commissioner, Indian Textile Bulletin. Bombay, 1980.

254 EVASION

OF EXCISE

DUTIES IN

INDIAt STUDY OF

COTTON TEXTILE

FABRICS

Difference between Declared and Estimated Yarn Consumption (1978-79)

SI.No.

2.

4.

Quality of cloth and yarn counts*

1

Coarse (1 - 16s)

Med-B (17— 25s)

Med-A (26 — 40s)

Fine(41 — 60s)

Declared cotton yarn consumption of mills (million kgs.)

Declared cotton cloth production

of millsMillionmertres

Million*kgs.

2

116.90

137.60

161.75

10.75

3

435.00

921.25

1C75.50

80.75

4

92.05

116.91

182.46

1U.09

Estimated yarn consump­tion*** (million kgs.)

5

96.89

123.06

192 C6

10.62

Differences between declared and estimated consumption (million kgs.)

6

20.01

14.54

-3 0 31

0.13

( Codtd.)

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TABLE 4.7 ( Conti!.)

1 2 3 4 5 6

5. Superfine(61s and above)

10.00 J 27.25 9.21 9.68 0.32

TOTAL 437,00 3239.75 410.72 432.31 4.69

Aotes: ‘ Data on count-groups of yarn are available in the intervals of l-10s, 11 -20s, etc. Therefore, to get the count-groups J-16s, 17-25s. etc., which corresponded to the variety of cloth (like coarse, Med-B.), we have assumed uniform distribution of yarn within the intervals l-10s, ll-20s and arrived at the above count-groups.

**For converting the cloth data given in metres into kilograms we have taken the equivalents averaged for five years (1969-1973) on the basis of the data given in National Productivity Council (1976). The computed equivalents per 100 metres of coarse, medium B, medium A, fine and superfine cloth are 21.16 kgs., 12.69 kgs., 10.89 kgs., 12.50 kgs., and 7.23 kgs,, respectively.

**In the process of weaving the cloth, the estimated loss of yarn is about 3 per cent (AT1RA) to 5 per cent (Dr. Aggarwal, I1T, Delhi). In the above figures a 5 per cent loss is assumed.

256 EVASION

OF BXCISE

DUTIES IN

INDIA: STUDY OF

COTTON TEXTILES

FABRICS

we have arrived a t the to ta l w eight o f the c lo th p roduced in the m ill sector.

A ccording to the A T IR A norm s, the losses involved in w eaving yarn a t w inding, w arping, sizing and o ther stages should aggregate ab o u t 3 per cent. This, how ever, is the m inim um w astage involved and , in actuality , the w astage could indeed be h igher. O n the basis o f o u r d iscussion w ith textile technologists we have taken the w astage a t 5 per cent and estim ated the expected consum ption o f yarn . The diffe­rence betw een the yarn th a t w ould have been consum ed and the actual consum ption indicates the ex ten t o f understa tem ent o f cloth p ro d u c tio n .

O ur estim ates, as may be seen from the table, do no t indicate significant un d ersta tem en t o f clo th ou tp u t. The u nderestim ation seems to be o f the o rd e r o f only 1.00 per cent o f the c lo th p ro d u c tio n . This again can n o t definitely be a t tr i­bu ted to tax evasion as ou r assum ption regard ing the co tton c o n ten t in b lended fabrics and the w astage norm s are subject to som e m argin o f e rro r.

H ow ever, it is necessary to note th a t the estim ate o f un d er­s ta tem en t is very sensitive to the length-to w eight conversion ra tio we have em ployed in the study. If indeed these are over­estim ates, we could conclude th a t the mill sector does in fact indulge in under-repo rting o f its p ro d u c tio n in o rd e r to evade excise du ty . The suspicion th a t the ra tio could be over-esti­m ated arises from the fact th a t the length-to-w eight ra tio is tak en from the In d ian C o tto n M ills F ederation (IC M F ) w hich m ay already include an elem ent o f u n dersta tem en t o f the o u t­p u t. A gain, the resulting c lo th -yarn ra tio in the mill sector w orks ou t to be m uch low er th an the conversion norm s used in the case o f hand loom s and pow erloom s. But, to be able to conclusively sta te th a t the length-to-w eight ra tio is over­estim ated, w e have to prove th a t u n dersta tem en t has been done only in respect o f the m eterage (length) o f clo th and not its w eight. I f bo th have been equally understated the ra tio w ould rem ain the sam e. W e have no reason to presum e th a t understa tem ent w ould have 'been done in respect o f only the length o f the clo th produced and n o t its w eight. On the issue

o f the mill sec to r’s c lo th -to -y a rn conversion ra tio being low er th an th a t o f the hand loom and p ow erloom sectors, we may sta te th a t this can happen due to differences in w eaving tech ­nology, category-m ix o f c lo th , the average w idth o f c lo th as well as the density o f yarn in the clo th . In o rd e r to avoid any bias arising from the instab ility o f the length-to-w eight ra tio , we have em ployed yearly average ra tio s fo r five years (1969-73) fo r each q u a lity o f c lo th . N evertheless, it is p ossi­ble th a t these ra tio s are over-sta ted and evasion arising from u n d ersta tem en t o f the q u an tity o f o u tp u t is ap p aren t, and no t proved.

On the w hole, it appears th a t there is no significant degree o f evasion o f du ty on co tto n textile fabrics th ro u g h the sup­pression o f o u tp u t. This, as we have reasoned earlier, is p lau­sible since the p ro d u ctio n flows in the com posite mill sector can be easily m onito red and therefore , the probability o f being detected is h igher i f the tax is evaded by suppressing o u tp u t.

b. Undervaluation and evasion o f duty

U n d erv a lu a tio n fo r evasion o f the excise du ty can be done in m any ways. G iven th a t the tax rates levied on the fabrics are graded in term s o f coun ts o f fabrics and th e ir prices, undervaluation can easily be done by b o th m isclassifying the fab ric co u n t and the p rice o f the fabric. O ther m ethods o f u n d erva lua tion b rough t to o u r no tice include tie-in-sales4 and m isclassification o f sound fabrics as ‘fe n ts ’ and ‘rag s’. Again, there can also be u n dersta tem en t o f the m anufac tu ring sale price 5. As it may n o t be possible to m on ito r the d istribu tive

1 When a dealer buys fabrics of two different prices, the volume ofpurchases of the fabric of lower price may be overstated and that ofhigher price correspondingly understated. This method is called‘tie-in-sales’.

5 It is very difficult to draw a distinction between evasion and avoid­ance in such cases. It is well known that the invoice price of the cloth is generally almost 15 to 25 per cent lower than the stamped price. While the retailer recovers the sale margins at various stages of transaction added to the stamped price, including the excise duty thereon from the consumer, the government receives a much lower

channels as m uch as the p roduction flows, th e p robability o f detecting evasion w ould be lower w hen these m ethods are em ployed and , therefore, we have hypothesised th a t under th is m ethod , the evasion could indeed be significant.

R evenue loss arising from evasion o f the tax th rough undervaluation can be quantified by independently estim ating the am oun t o f tax th a t should have been collected (po ten tia l) on the basis o f household consum ption o f textiles an d com ­parin g the estim ate w ith the ac tu a l collection 6. As we have found th a t revenue loss due to the suppression o f q uan tity is negligible, the d iscrepancy betw een the po ten tia l and the ac tual could easily be ascribed to evasion th rough u n d er­valuation .

T o estim ate the ex ten t o f evasion, we have to proceed th rough various steps w hich are detailed in Table 4.8. The C o n su m er Purchases o f T extiles (G ovenrm ent o f Ind ia , 1978, 1979) gives us the price-range-w ise details on household purchases o f categories o f cloth such as dhoties, sarees, drill shirting , coating , su iting , lad ies’ dress m ateria ls, bed cover, bed sheet, chadder, long clo th and sheeting. These together co nstitu te 67 per cent o f to ta l q u an tity o f c lo th con­sum ed and 71 per cen t o f the value o f c lo th consum ed. F rom the to ta l consum ption we have excluded the consum ption o f hand loom and khad i c lo th purchases, the d a ta on w hich are available in Consumer Purchases o f T exiiles (G overnm en t o f

6 Actually, comparison should be made with the duty liability for that year’s declared production and not actual collections. But the data on the former are not available and hence we have to compare with the latter. The implicit assumption in doing so is that the amount of arrears in that year is not different from the previous year’s.

Footnote contd. from p. 258 amount of excise revenue than that payable on the stamped price. This arises because of the lack of coordination between the offices of Textile Commissioner which merely require the price to be stamped on the cloth and that of the Excise department which collects excise duties on the invoice price irrespective of the stamped price. The illegality of the discrepancy cannot be established easily and therefore the loss of duty under this head is on the borderline between evasion and avoidance.

TABLE 4.8

Estimation of Consumption o f M ill Cloth o f Different Varieties

Q —Quantity in million metres V =Value in million rupees

ConsumptionVarieties per household Total consumption Controlled cloth Handloom textiles

Q in metres

V =R s Q V Q V Q V

(1) (2) (3) (4) (5) (6) (7) (8)

1. Dhoti 11.6617 61.8653 1171.7618 6216.1944 66.6878 278.5213 153.3317 690.5956

2. Saree 16.2050 105.3554 1628.2703 10586.0579 44.8588 197 8554 274.8114 1740.62553. Shirting 10.1288 71.4905 1017.7368 7183.3297 103 3528 330.0976 31.6510 312.79274. Coating/Suiting 1.3577 131209 136.4210 1318.3815 14.4422 27.6002 12 9618 113.2404

5. Ladies’ dress material 8.2241 59.8994 826.3534 6018.6618 — — 6.0288 61.89546. Bed sheet/bed cover/

chaddar/wearablechaddar 1.9182 17.7214 192.7398 1780.6374 7.0336 71.2400

7. Long cloth/sheeting 5.2933 27.0240 531.8681 2715.35S0 108.3975 431 3003 4.1197 17.3829

TOTAL 54.7888 356.4769 5505.1512 35818.6207 337.7391 1265.3747 459.9380 3011.7225

260 HVASION

OF EXCISB

DOTIES IN

INDIA: STUDY

OF COTTON

IBXTILE FABRICS

Khadi textilesPowerloom and

Mill sectorConsumption consi­dered of powerloom

Powerloom Consumption of mill sector

Q V Q V Q VValue at

Q V

Varieties (3 )- (5)+ (7)+ (9)

( 4 ) - (6) + (8)+ (9)

Value at ex— factory price

retailprice

( i n - ( i 3 ) (12)—(15)

(9) (10) (11) (12) (13) (14) (15) (16) (17)

1. Dhoti 15.4738 64.8093 938.2685 5182.2682 301.7450 1149.6230 1547.9520 634.5230 3636.31602. Saree 4.9235 10.9523 1303.6766 8632.6247 419.9740 1915.3490 2729 8310 883.7030 5902.79403. Shirting 9.9676 95.9579 872.7654 6444.4815 281.2220 1429.9520 1889.8120 591.5430 4054.6700

4. Coating/suiting 15.4738 117.2596 93.5431 1060.2813 30.1890 235.4480 329.6640 63.3540 730.6170

5. Ladies’ dressmaterial 10.0178 91.2354 810.3068 5865.5310 261.1450 1300.8350 1781.0090 549.1620 4084.5220

6. Bed sheet/bed cover/chaddar/ wearable chaddar 6.0991 36 4740 179.6071 1672.9234 57.8500 370 7800 514.8650 121.7570 1158.0500

Contd.

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9 10 11 12 13 14 15 16 17

7. Long cloth/ sheeting — — 419.3509 2266.6748 135.0340 502.6580 668.4180 184.3170 1598.2570

TOTAL 61.9556 416.6885 4615.5184 31124.7849 1487.1590 6904.6450 9461.5510 3128.3590 21663.2340

t^otes: 1. Columns (1) and (2) are calculated from Consumer Purchases and Price Trends o f Textiles, Monthly Bulletin.

2. Total consumption both quantity and value columns (3) and (4) is derived by taking total no. of households ( = 100479500) in 1978-79.

3. Controlled cloth [columns (5) and (6)] is from Textile Commissioners’ Office and relates to packing of controlled cloth.

4. Columns (7), (8), (9) and (10) are arrived at by multiplying the to tal number o f households with the per household data available on consumers* purchases.

5. After taking total production of powerlooms from the report of the Expert Committee on Tax Measures to Promote Employment, Government o f India, (1980) the quantity o f cloth due to diversion of hank yarn from handl'oom sector was added to get actual quantities o f powerloom cloth. From the total production, quantity o f powerloom cloth exported was deducted to get the quantity available for home consumption. The value of the powerloom cloth available for home consumption was derived from the price data available in the abovementioned report. Taking 67 per cent of the quantity and 71 per cent o f the value, the distribution in each category was made in the same proportion of columns (11) and (12) for quantity and value of powerloom cloth, respectively,

262 evasio

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India, 1978, 1979). Also we have excluded the quan ti ty and value o f controlled cloth consum ption from the mill sector on the basis o f the data on controlled cloth packed during the period as given by the Textile Com m issioner’s Office. The value o f controlled cloth has been estimated on the basis o f the inform ation on prices o f the mill sector cloth o f different quantit ies available in the R eport on T ax M easures to Prom ote Em ploym ent (G overm ent o f India, 1980), adjusted for the subsidies assuming subsidy per square m etre o f con­trolled cloth.

The third im p o r tan t adjustm ent pertains to the exclusion o f pow erloom cloth consum ption . This necessitates the estimation o f b o th the quantity and value o f the consum ption o f powerloom cloth. Assuming th a t the changes in stocks are zero, consum ption o f pow erloom cloth would be equiva­lent to its p roduc tion minus exports. However, as worked ou t earlier, official p roductiom estimates o f pow erloom cloth are understated to the tune o f 513 million metres as these have been misclassified as hand loom cloth. Therefore, we have added these to the p roduction estimates o f powerloom cloth given in the Report on Tax Measures to Promote Employ­m ent (G overnm ent o f India , 1980) to arrive a t the quantity o f pow erloom cloth production. The rep o r t gives the esti­mates in terms o f different qualities, namely, coarse, medium- B, medium-A, fine and superfine. The misclassified quantity o f cloth can also be easily disaggregated in to these categories. The repo rt also gives the average producers’ prices o f the five qualities o f cloth on the basis o f which we have arrived at the estimated ex-mill value o f p roduction o f pow erloom cloth. Estimates o f the quantity and value o f consum ption o f pow er­loom cloth have beed obta ined by deducting the quan ti ty and value o f exports from the relevant production estimates. The value o f consum ption in retail prices has been estimated by adding the margins derived by us on the basis o f the

replies to the q u estionna ire circu lated am ong the textile m ills7.

In o rd er to estim ate the ex ten t o f evasion arising from underva lua tion o f co tton textile fabrics, we have relied heavily on the d a ta on consum er purchases o f textiles collected by the M arket R esearch wing o f th e Textile C om m ittee . These da ta have been collected since 1969 fo r the sam ple h o u se ­holds stratified over size o f tow ns sp read across the country and incom e classes o f the households. The in fo rm ation on the purchase o f c lo th is collected fo r 7450 such households th a t vo lun tered the in fo rm atio n and in fo rm atio n from these households is collected on a con tinuous basis every year. Besides, abou t 20-25 per cen t o f the sam ple is replaced every year to obviate the bias arising ou t o f sta ticness o f the sam ple.

These d a ta on con su m p tio n o f textiles are collected on a scientific basis and have definite advan tages over o ther sources for various reaso n s8. F irst, no o th e r source gives the d a ta a t the level o f d isaggregation as this source does. Second, unlike the o th e r im p o rta n t source o f d a ta on consum ption , nam ely, the N a tio n a l Sam ple Survey, there is no reason to believe th a t the presen t source w ould have a significant dow nw ard bias. This is m ainly because, as the sam ple house­holds are the sam e every year, the questionnaires will be filled on the basis o f the accoun t o f th e ir purchases kept by them ra th e r th an on the basis o f th e ir m em ory. A gain, as the d a ta are collected by the Textile C om m ittee and no t the tax­ation departm en ts, there is no cause fo r households to u n d er­sta te th e ir purchases.

: We circulated a questionnaire to a number of textile mills to obtain information on the difference between ex-factory and retail prices of cotton fabrics of categories such as shirting, suiting, dhoti, long cloth, drill, saree, ladies’ dress material, coating, sheeting, bed sheet, covers and chaddar. From the same survey, we have obtained infor­mation on the average width of the various types of fabrics also. The questionnaire is given in Appendix II.

* A detailed exposition of the method of collecting these data is given in the Report on Consumer Purchase o f Textiles published annually by ;ne Textile Committee, Ministiy of Commerce, Government of India.

W e have m entioned earlier th a t consum ption o f the seven categories o f the c lo th considered by us con stitu tes 67per cen t o f the quan tity o f clo th consum ed and 71 per cen t o f the value o f c lo th consum ed in the aggregate. B ut i f we consider the consum ption o f m ill sec to r c lo th alone, these categories co nstitu te 69.3 per cen t o f the quan tity and 75.7 per cent o f the value.

I t is necessary to n o te an im p o rta n t anom aly here. The seven categories co n stitu tin g 69.3 per cen t o f the quan tity o f mill sector c lo th consum ed aggregate to 3128 m illion m etres. H ow ever, this is only 112 m illion m etres less th an the aggre­gate to ta l p ro d u c tio n o f 3240 m illion m etres as was rep o rted in T able 2.2. T he p roduction figures available fo r dom estic consum ption (p ro d u c tio n —exports ± changes in stocks) w ould w ork o u t to be low er than th e estim ated consum ption o f the seven categories which fo rm s only 69.3 per cent o f to ta l c lo th consum ption . This raises the suspicion th a t either the p roduction figures are u ndersta ted o r consum ption figures are overstated .

U n d ersta tem en t o f the p roduction figures is possible due to either o f the fo llow ing reasons:

(i) T he yarn p roduction figures are u n d ersta ted , w hich m eans th a t th e co tton p roduction figures a re u n d er­sta ted o r yarn deliveries to the hand loom and pow er­loom sectors are oversta ted .

(ii) The leng th -to -w eigh t ra tio em ployed to exam ine the ex ten t o f u n dersta tem en t o f o u tp u t could be an over­estim ate . The existence o f w ide d iscrepancy leads to the susp icion th a t som e am o u n t o f evasion m ay indeed be tak ing place by u ndersta ting the p roduction figure, a lthough we are unab le to quan tify the ex ten t o f understa tem ent.

The d iscrepancy po in ted o u t above may a lso arise i f the consum ption estim ates are oversta ted . As we have already explained, the sam pling o f the househo lds and the collection o f the consum ption d a ta have been done on a scientific basis and therefo re , we d o no t have any reason to presum e th a t there could be a significant over-estim ation o f the co n su m p ­

tion figures. H ow ever, there is a possibility th a t ou r a ssu m p ­tion o f the constancy o f changes in stock m ay no t be entirely realistic . The stock here refers to the sum to ta l o f stocks in the w holesale and reta il ou tle ts , on w hich we d o no t have any in fo rm atio n . T o the ex ten t th a t the stock figure for 1978-79 is d ifferen t fro m th a t o f the previous year, there can be a d iscrepancy betw een the p ro d u ctio n and consum ption figures. A lso, it is possible th a t m is-stam ping o f pow erloom clo th as com posite mill c lo th could have to som e ex ten t infl­ated the consum ption estim ates. In any case, i f the consum p­tion figures a re over-estim ated , o u r evasion estim ates w ould have, to th a t extent, an upw ard bias.

To calculate the tax po ten tia l in respect o f the categories o f fabrics considered by us, we require in fo rm ation on the purchases o f mill fabrics o f m ore th an 41 coun ts an d less than 41 counts, the la tte r disaggregated fu rther in term s o f different ex-mill price ranges correspond ing to the tax ra te categories. W e have separated the consum ption o f c lo th o f below 41 counts in p ro p o rtio n to the p roduction estim ates o f coarse, m edium -A and m edium -B fabrics given in the Reporton T a x M easures to Prom ote Em ploym ent (G overn ­m ent o f Ind ia , 1980). C orrespondingly , the p ro p o rtio n o f fine and superfine c lo th p roduction is applied to the to ta l con­sum ption to arrive at the consum ption o f c lo th above 41 counts. The values o f these categories have been ob ta ined by m ultiplying the q u an tities w ith re ta il prices, w hich are a rriv ­ed at by adding ap p ro p ria te m argins to the ex-m ill prices given in the sam e rep o rt.

As the rates o f excise du ty on co tton fabrics o f below 41 counts vary accord ing to the price o f the fab ric , we have to obtain the q uan tities, and values o f these fabrics in term s o f different price ranges correspond ing to tax ra te ca tegories. F o rtu n a te ly , Consumer Purchases o f Textiles (G overnm ent o f India, 1978, 1979) gives us d a ta on the price-range-w ise p u r­chases o f different varieties o f clo th considered by us. We have apportioned the mill c lo th consum ption o f less th a n 41 coun ts accord ing to the d a ta in these price-range-w ise p u r­chases. This does n o t im p art a significant b ias in th e e s ti­m ation , for, th e c lo th o f less th a n 41 coun ts co n stitu tes

alm ost 92 per cen t o f the q u an tity o f clo th purchases an d 91 per cent o f the value o f purchases. An ad d itio n a l assum ption involved in th is exercise is th a t the purchase o f the c lo th o f the decentralised secto r w ould fall in to a p a tte rn sim ilar to th a t o f the mill sec to r’s c lo th .

All the price ranges and values so fa r derived are in re ta il prices. To estim ate the tax p o ten tia l from these, we have to convert them in to ex-factory prices. S im ilarly, the quantities are in term s o f linear m etres w hereas the tax rates are speci­fied per square m etre. As m entioned earlier, on the basis o f the response received from the mills to a que5tionnaire c i r ­culated to them , we have ob tained bo th the average w id th o f the cloth o f different varieties considered by us and the aver­age m argin o f increase o f re ta il prices over the ex-factory prices. F ro m these, by app ly ing the relevan t rates o f taxa tion , we have estim ated the excise tax p o ten tia l in respect o f the categories o f mill cloth considered by us. These co m p u ta tio n s are detailed in in Tables 4.9 to 4.16 and the aggregate tax po ten tia l is derived in Table 4.17.

I t is seen from Table 4.17 th a t the categories considered by us should have yielded excise revenue am ounting to Rs 9 3 .7 1 crore from th e levy o f only the basic du ty and ano ther Rs 14.06 cro re from the levy o f special and ad d itiona l duties. As m entioned, the categories considered by us constit­u te only 75.7 per cent o f the value o f to ta l consum ption o f textiles. A ssum ing th a t the tax po ten tia l varies p ro p o rtio n a ­tely w ith the am oun t o f c lo th , the to ta l excise du ty potential in respect o f co tton fabrics o f the mill sector would increase by the sam e p ro p o rtio n . This w ould am oun t to Rs 140.51 crore But the- ac tual collections in 1978-79, as given in the Statistical Year Book o f C entral Excise (G overnm ent o f Ind ia , 1984), am ounted to only Rs 100.97 crore (R s 87.80 crore basic duty + Rs 13.17 cro re special and ad d itio n a l) \ Thus, the estim ated excise du ty evasion by m eans o f undervaluation o f mill sector fabrics alone am ounted to Rs 39.54 cro re in 1978-79. T his form ed as m uch as 28.1 p er cent o f the excise du ty collection from c o tto n textile fabrics.9 Again, it should be noted that taking actual collections rather than the duty liability from declared production makes an implicit assumpt­ion that amount of arrears in the year has not changed from the previous year.

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth o f Over 41 Counts o f Yarn

Varieties Quantity(millionmetres)

Value at retail price (Rs in million)

Percentage decrease of ex­factory price over retail price

Estimated value at ex-factory price:Col. (2)— Col (2>X(3)

100 (Rs in million)

Rate of basic excise duty (per cent

ad valorem)

Basic duty liability Col. (4)X(5)

100 (Rs in million)

(1) (2) (3) (4) (5) (6)

1. Dhoti 5J.90 334.72 25.75 248.53 37.282. Saree 72.29 543.65 29.85 381.37 57.213. Shirting 48.39 419.48 24.42 317.04 47.564. Coating/suiting 5.18 67.29 28.59 48.05 15 7.21S. Ladies’ dress material 44.92 376.18 26.93 274.87 41.236. Bed sheet/bed cover/ chaddar/

wearable chaddar 9.96 106.66 28 00 76.79 11.527. Long cloth/sheeting 23.26 147.20 24.86 110.61 16.59

TOTAL 255.90 1995.18 218.60

268 EVASION

OF EXCISE

DUTIBS IN

INDIA: STUDY

OF COTTON

TEXTILE FABRICS

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth o f Below41 Counts of Yarn (Variety : Dhoti)

(Price range (Rs) Q = V = Percentage Estimated Estimated Estmated Rate of BasicExceeds Does quantity value at decrease value at ex-factory ex-factory basic duty

not in retail of ex­ ex-factory price per price per excise liabilityexceed million price factory price metre (Rs) sq.metre duty Col.(4) x

metres (Rs in price Col.(2)— Col.(4)/ (Rs) (per cent Col.(7)million) from Col.(2)X (3) Col.(l) Col (5) ad valorem) 100

retail 100 (1.1741)* (Rs inprice (Rs in million) million)

(1) (2) (3) (4) (5) (6) (7) (8)___ 2 20.68 39.93 29.65 1.43 1.221 0.59

2 3 69.56 201.94 149.94 2.15 1.83 | 3.003 5 158.36 634.84 471.37 2.98 2.54 y 2 9.435 6 106.04 539.48 400.56 3.78 3.22 | 8016 7 81.04 500.88 371.90 4.59 3.91 J 7.447 8 57.56 424.66 25.75 315.31 5.48 4.671 3 9.468 10 31.81 275 19 204.33 6.42 5.47 J 6.13

10 11 24.18 241.86 179.58 7.43 6.331 4 7.1811 12 6.47 71.60 53.16 8.22 7.00 J 2.1312 15 18.06 2 8 .43 162.18 8.98 7.65 6 9.7315 20 5 83 84.47 62.72 10.77 9.17 10 6.2720 — 3.03 66.32 49.24 16 25 13.84 15 7.39

TOTAL 582.62 3299.60 76.76

Note: • Average width of the cloth is 1.1741 metres.

ev

asio

n: an

empir

ica

l e

stim

at

e

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth of Below 41 Counts o f Yarn (Variety: Saree)

Price range (Rs) Exceeds Does

notexceed

Quantityinmillionmetres

Value at retail price (Rs in million

Percentage decrease of ex-factory price from retail

price

Estimated value at ex-factory price. Col.(2)— Col.(2)X(3)

100 (Rs in million)

Estimated ex-factory price per metre.(Rs) Col. (4)/ Col.(l)

Estimated ex-factory price per sq. metre (Rs)

Col.(5) (1.0919)*

Rate of basic excise duty

(per cent) ad valorem

Basic duty liability Col.(4)X Col.(7)

100 (Rs in

million)

(1) (2) (3) (4) (5) (6) (7) (8)

_ 2 21.10 38.05 26.69 1.26 M S') 0.532 3 50.39 129.16 90.61 1.80 1.65 | 1.813 4 103.21 353.17 247.75 2.40 2.20 y 4.964 5 113.76 496.79 348.50 3.06 2.80 | 2 6.975 6 102.08 536.99 376.70 3.69 3.38 J 7.536 7 83.33 523.59 36'.30 4.41 4.04-1 11 027 8 98.51 709.55 497.75 5.05 4.62 1 14.938 9 63.70 521.98 29.85 366.17 5.75 5.27 y 3 10999 JO 47.31 435.70 305.64 6.46 5.92 J 9.17

270 EVASION

OF EXCISE

DOTIES IN

INDIA: STUDY OF

COTTON TEXTILB

FABRICS

TABLE 4.11 (Contd.) REV

ENU

E YIELD

AN

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TABLE 4.12

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth of Below 41 Counts of Yarn (Variety:Shirting)

Price range (Rs) Q uantity Value at Percentage Estim ated Estim ated Estim ated R ate o f Basic

Exceeds Does in retail decrease value at ex-factory ex-factory basic dutynot million price o f ex­ ex-factory price per price excise liabilityexceed metres (Rs in factory price- metre. (Rs) (per sq. duty col (4)X

million) price col. (2)— col. (4)/ m etre) (per cent col. (7)from col. (2)X(3) col. (1) (col. (5) ad valorem 100retail 100 (0.8876)* (Rs inprice (R s in (Rs) million

m illion)

(!) (2) (3) (4) (5) (6) (7) (8)

- - 2 1.14 2.071 1.80 1.58 1.781 0.042 3 7.33 19.44 >• 13.14 16.89 2.30 2.59 y 2 0.343 4 17.22 61.20 J 53.16 3.09 3.48 J 1.06

4 5 58.44 267.96 17.48 221.12 3.78 4.261 6.635 6 101.79 564.04 17.79 463.70 4.56 5.14 y 3 13.916 7 102.93 678.17 19.68 544.71 5.29 5.96J 16.34

(Contd. >

272 EVASIO

N

OF EXCISE

DU

TIES IN

IND

IA:

STUD

Y OF

COTTO

N

TEXTILE

FA

BR

ICS

evasio

n: a

n em

pirical estim

ate 11$

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TABLE 4.13

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth o f Below 41Counts of Yarn (Variety : Coating/suiting)

P rice range (Rs) Quantity Value at Perceniage Estim ated Estim aten Estim ated R ate of BasicExceeds Does in retail decrease value at ex-factory ex-factory basic duty

not million price o f ex­ ex-factory price per price per excise liabilityexceed m etres (R s in factory price m etre. (Rs) sq.m etre duty Col,(4)X

million) price Col. ( 2 ) - Col. (4)/ (Rs) (per cent CoJ.(7)from Col (2)X (3) Col ( i) Col. (5) ad valorem) 100retail 100 (0.9933)* (Rs inprice (R s in m illion

million)

0 ) (2) (3) (4) (5) (6) (7) (8)

_ 3.50 0.10 0.33 0.24 2.40 2.42-1 Neg.3.50 5.00 1.09 4.05 2.89 2.65 2.671 0.065 00 6.00 2.66 13.33 9.52 3.58 3 60J z 0.206.00 7.00 5.03 31.24 22.31 4.44 4.471 3 0.677.00 8.00 6.87 49.62 35.43 5.16 5.19J 1.06

8.00 9.00 6.59 55.65 39.74 6.03 6.07 4 1.59

(Contd.)

274 EVASION

OF EXCISE

DUTIES IN

IND

IA:

ITUD

Y OF

COTTO

N

TEXTILE

FA

BR

IC*

evasio

n: a

n b

mp

irical estimate

275

S3

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covovq

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P o ten tia l T ax Base and Revenue from Basic Duty (1978-79) on C loth of Below 41 Counts of Y arn (V arie ty :L ad ies D ress M ateria l

Price range (Rs) Quantity Value at Percentage Estimated Estimated Estimated Rate of BasicExceeds Does in retail decrease value at ex-factory ex-factory basic duty

not million price of ex­ ex-factory price per price per excise liabilityexceed metres (Rs in factory price metre. (Rs) sq. metre. duty col.(4)X

million) price Col. (2)— Col. (4)/ (Rs) (per cent col. (7)from Col. (2)X(3) Col. (1) Col. (5) ad valorem) 0 l0retail 100 (0 9334)• (Rs inprice (Rs in million)

million)

(1) (2) (3) (4) (5) (6) (7) (8)

2 2.87 3.71 2.71 0.94 1.011 0.052 3 10.89 27.81 10.32 1.87 2.00 | 0.413 4 25.62 82.70 60.43 2.36 2.53 y 2 1.214 5 60.82 250.99 187.78 3.09 3.31 J 3.76

5 6 90.86 467.25 341.42 3.76 4.031 10.246 7 68.48 423.12 309.17 4.51 4.83| 3 9.28

(Contd).

276 evasio

n of

excise d

uties

in in

dia

: study

of co

tton

textile fa

bim

cs

1 2 3 4 5 6 7 8

7 8 52.59 377.51 26.93 275.85 5.25 5.62 3 8.28

8 9 55.92 456.87 333.83 5.97 6.40 4 13.35

9 10 25.36 232.88 170.17 6.79 7.19 6 10.21

10 12 56.48 589.63 430.84 7.63 8.17 8 34.47

12 15 36.31 463.91 338.38 9.34 10.01 12 40.6815 20 13.97 230.66 168.54 12.06 12.921 15 25.2820 — 4.08 95.30 69.64 17.07 18.29 J 10.45

TOTAL 504.24 3708.34 167 67

Note: • Average width of the cJoth is 0.9334 metre.

to-J

EVASION : AN

BMPIRICAL

ESTIMATE

Potential Tax Base and Revenue from Basic Duty (1978-78) on Cloth o f Below 41 Counts o f Yarn (Variety: Bed Sheet/Bedcover Chaddar)

Price range (Rs) Exceeds Does

notexceed

Quantityintrillionmetres

Value at retail price (Rsin million)

Percentage decrease of ex- factory pricefromretailprice

Estimated value at ex-factory price.Col. (2)—Col. (2)X(3)

100(R$ in million)

Estimated ex-factory price per metre. (Rs)

Col. (4)/Col. (1)

Estimated ex-factory price per sq. metre.

(Rs)Col. (5) (1.375)

R ate of Basic basic liability excise Col.(4)X duty Col. (7) (per cent ioo ad valorem) (Rs in

million)

(1) (2) (3) (4) (5) (6) (7) (8)

_ 2 o.so 0.74 0.53 1.06 1.021 0 012 3 1.42 3.37 2.43 1.71 1.65 | 0.053 4 3.99 14.19 10.22 2.56 2.47 y 0.204 5 8.81 40.27 28.99 3.29 3.17 | 2 0.585 6 12.10 69.81 50.26 4.15 4.00 J 1.01

7 13.93 93.36 67.22 4.83 4.66 3 2.02

278 EVASION

OF BXCISE

OUTIBS IN

INDIA: STUDY

OF COTTON

TBXtILB

FABRICS

1 2 3 4 5 6 7 8

7 8 10.96 82.01 59.05 5.39 5.201 3 1.778 9 16.49 141.83 28.00 102.12 6.19 5.97/ 3.06

9 10 8.09 78.86 56.78 7.02 6.77 4 2.2710 12 13.23 150.04 108 03 8.17 7.87 6 6.4812 15 10.36 140.89 101.44 9.79 9.44 10 10.14

15 20 7.83 132.37 95.31 12.17 11.73 14 13.34

20 25 2.84 64.24 46.25 16.29 i s /zo^ 6.9425 29 0.36 9.88 7.11 19.75 19.04 | 15 1.0729 35 0.62 18.29 13.17 21.24 20.47 )■ 1.9835 40 0.16 3.79 2.73 27.30 26.31 | 0.4140 — 0.18 7.47 5.38 29.89 28.81 J 0 81

TOTAL 111.81 1051.41 52.13

Note : * Average width of the cloth is 1.0375 metres,

" J

ev

asio

n: an

empir

ica

l e

stim

at

e

Potential Tax Base and Revenue from Basic Excise Duty (1978-79) on Cloth of Below 41 Counts o f Yarn (Variety : Long Cloth/Sheeting)

Price range (Rs) Quantity Value of Percentage Estimated Estimated Estimated R ate of BasicExceeds Does in retail decrease value at ex-factory ex-factory basic duty

not million price of ex­ ex-factory price per price per excise liabilityexceed metres (Rs in factory price sq.metre sq.metre duty Col.(4) X

million,) price Col. (2 )- (Rs) (Rs) (per cent Col. (7)from Co!.(2)X(3) Col. (4)/ Col. (5) ad valorem) 100retail 100 Col. (1) 1 J574)*price (Rs in (Rs in

milllion) million)

(1) (2) (3) (4) (5) (6) (7) (8)

_ 1.50 0.39 0.581 0.46 I 18 1.021 0.011.50 2.00 3.37 6.53 I 5.23 1 55 1.34 | 0.102.00 2.50 10.63 24.96 i 20.00 1.88 1.62 | 2 0.402.50 3.00 14.67 41.21 y 33.02 2.25 1.94 y 0.663.00 3.50 17.18 58.04 1 19.87 46.51 2.71 2.34 | 0.933.50 4.00 10.03 50.50 J 40.47 3.11 2.69J 0.81

280 EVASION

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DUTIES IN

INDIA'. STUDY OF

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FABRICS

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TABLE 4.17

Aggregate Tax Potential from the Considered Varieties o f Cloth

(Rs in million)

Potential tax liability (Basic) Variety Variety Variety Total

upto 41 above 41counts counts

1. Dhoti 76.76 37.28 114.042. Saree 152.94 57.21 210.153. Shirting 180.09 47.56 227.654. Coating/suiting 41.31 7.21 48.525. Ladies dress material 167.67 41.25 208.906. Bed sheet/bed cover

wearable chaddar57.13 11.52 63.65

7. Long cloth/sheeting 30.96 16.59 47.55

TOTAL 701.86 218.60 920 46

Note: Rs 920. 46 million, shown as the total potential tax, however, does not include the amount that is due from the controlled cloth. Adding Rs 1.66 crore of potential tax from the controlled cloth, the total works out to Rs 93-71 crore.

Aggregate Loss o f Duty on Cotton Textile Fabrics

The evasion o f du ty on co tton clo th th rough in ter-sectoral m isclassification was estim ated earlier a t Rs. 12.70 crore . The loss o f revenue to the exchequer by m eans o f undervaluation in the mill sector fabrics has been estim ated a t Rs 39.54 crore. Thus, in the aggregate ab o u t Rs 52.24 cro re seem to have been evaded. H ad th is am ount been collected, the a g ­gregate excise d u ty from c o tto n textile fabrics w ould have am o u n ted to R s 184.85 crore 10. Thus, the ex ten t o f evasion w orks o u t to as m uch as 28.3 per cent. In o ther w ords, a lm ost 47.2 per cent o f the ac tual duty collection from co tton textile fabrics seems to have been evaded.

10 The amount of excise duty collected in 1978-79 is shown to be Rs 132.61 crore.

We m ay now sum m arise the findings o f our study. We have hypothesised th a t excise duty is evaded by tak ing ad ­vantage o f in ter-sec to ral and in tra -sec to ra l differences in the s truc tu re o f the excise duty . D u ty evasion th rough mis- classification o f yarn w as estim ated a t Rs 6.90 crore, form ing 7 per cen t o f the yarn duty . The in ter-sectoral missclassifica- tion o f clo th is estim ated to have resulted in evasion o f du ty to the tune o f Rs 12.70 crore. As regards evasion arising from the in tra-sectoral differences in the tax structure , ou r analysis reveals th a t suppression o f quan tity does n o t seem to have been prac tised by the mill sector on a significant scale, w hich also conform s to o u r a priori reasoning. H ow ­ever, th rough undervaluation o f the mill secto r c lo th , a sizeable am o u n t o f revenue am ounting to Rs 35.54 crore seems to have been evaded.

Limitations o f the S tudy

The com plexity o f the s truc tu re o f excise du ty on co tton textile fabrics an d the lack o f detailed disaggregated da ta co rresponding to the com plex excise ta riff schedule m akes im perative certa in assum ptions while estim ating the evasion o f excise duty . We have m ade the assum ptions explicit in ap p ro p ria te places while explain ing the m ethodology. H ow ­ever, it seems necessary to re-cap itu la te so as to ind icate the possible d irections and size o f bias in our estim ates.

Second, in our estim ation , we have considered excise evasion arising ou t o f in ter-sec to ral m isclassification o f yarn and clo th , on the one hand , and understa tem en t and under­valuation o f the o u tp u t o f the com posite m ill sector, on the o ther. W hile considering evasion in the com posite m ill sector, it is necessary to p o in t ou t th a t ou r em phasis has been m ainly on pure co tton fabrics. H ow ever, as was poin ted o u t earlier, some p o rtion o f blended fabrics falls w ithin the C en tra l excise definition o f co tton fabrics. A lthough the possible underestim ation and evasion o f the du ty therefrom is taken in to account by assum ing the co tton con ten t in blended yarn as 35 per cent, the possible evasion o f the duty arising from undervaluation o f blended fabrics could no t be estim ated by us. This is because we do n o t have any in fo rm ation on the

p ro p o rtio n o f blended fabrics falling w ith in the excise definit­ion o f co tton fabrics. In any case, the am o u n t o f evasion arising from th is source m ay no t be sub stan tia l as, the blended fabric form s only 16 per cen t o f the co tto n plus b lended fabrics and the p ro p o rtio n o f blended fabrics falling w ithin the excise defin ition o f co tton fabrics w ould be m uch sm aller. N evertheless, it is necessary to n o te th a t, to th a t ex ten t, o u r estim ate o f evasion has a dow nw ard bias.

We have already po in ted ou t the anom aly arising from the discrepancies in p roduction and consum ption estim ates. This w ould im ply th a t e ither p ro duc tion estim ates are understa ted , w hich m eans ou r conclusion th a t evasion due to suppression o f quan tity is insignificant, needs to be qualified, o r co n su m p ­tion es;im ates are o versta ted , w hich im plies th a t ou r estim ate o f evasion due to u n d erva lua tion has an elem ent o f upw ard bias.

I t is necessary to m ention th a t our a ttem p t a t m easuring the ex ten t o f evasion has been confined to co tton textile fabrics (Tariff Item 19) and any generalisation from th is on the extent o f evasion by the textile sector as a w hole would n o t be ap p ro p ria te . A lthough we have estim ated the evasion o f yarn duty arising from the conversion o f h an k yarn in to o ther form s, we have no t m ade a com prehensive study o f this o r the evasion o f duty in respect o f o ther articles in the textile sector.

W e had m entioned earlier in th is chap te r th a t a significant am oun t o f tax evasion seem s to have been tak ing place th rough the m isclassification o f pow er-processed fabrics as hand-processed . As we do no t have any reliab le in fo rm at­ion th a t w ould help us to estim ate the evasion thus p ractised in the unorganised sector, we have n o t a ttem pted to m easure this. We have taken only the recorded am o u n t o f pow erloom cloth misclassified as h and loom cloth as the low er lim it fo r m easuring the ex ten t o f evasion in th is regard . W hile the ac tual evasion on th is account m ay no t be as h igh as the estim ates m ade by the M ill O w ners A ssociation (R s 120 crore in 1981-82), we th ink th a t it w ould be sizeable and ce rt­ainly higher th a n o u r estim ates.

W hile estim ating the ex ten t o f evasion arising from the undervaluation o f the fabrics in the com posite mill sector, for w an t o f d a ta a t the desired level o f disaggregation , we had to m ake a num ber o f assum ptions. The im portan t am ong these assum ptions are: (i) The d a ta on co tton c lo th consum p­tion given in the Consumer Purchases o f Textiles (G overn ­m ent o f Ind ia , 1978, 1979) are re liab le ; (ii) the level o f re ta il stocks a t the end o f the year has no t changed in com parison w ith th a t a t the beginning o f the year, so th a t p roduction m inus exports does, in fact, represen t consum ption; (iii) the pa tte rn o f consum ption o f m ill sector clo th is identical to the p a tte rn o f its p ro d u c tio n . T hus, the purchase o f c lo th o f m ore than 41 counts and less than 41 counts, the la tte r d is­aggregated in term s o f v a rious price ranges, could be derived in p ro p o rtio n to the relevan t p ro d u c tio n p a tte rn , the da ta fo r w hich are available; (iv) the category-w ise consum ption o f mill and pow erloom clo th is iden tical. H ence the to ta l m ill c lo th could be a llocated am ong the d ifferent item s in the category in p ro p o rtio n to th e ir relative shares in the mill and pow erloom cloth taken toge ther, an d (v) the d is tribu tion o f the categories considered by us in term s o f tax ra te categories is iden tical to the d istribu tion o f c lo th o f the categories n o t considered by us. A ccordingly, on the basis o f the evasion figures ob tained on th e categories considered in the study form ing ab o u t 70 per cen t o f to ta l purchase, the to ta l evasion estim ates are ob tained by blow ing up o u r estim ates p ro p o r­tionately . I t is necessary to m ention th a t assum ption (iv) m ay resu lt in an upw ard b ias in o u r estim ates o f evasion. This is because, as we have po in ted o u t earlie r, the p ro p o rtio n o f fabrics o f h igher coun ts in the consum ption o f pow erloom fabrics is h igher. I f these fabrics are p riced higher, then our estim ates o f the consum ption o f h igher-priced categories o f mill sector c lo th get exaggerated; hence, th e estim ates o f evasion a lso get exaggerated accordingly.

5

Reform of Excise Duty on Cotton Textiles—Broad Issues

In troduction

I t has been our con ten tion th a t, inter alia, the n a tu re o f the industry and the s tru c tu re o f excise duty p a rtly determ ine the m ethod o f evading the excise du ty on co tton textile fabrics. A gain, the n a tu re o f the industry itse lf has been an outcom e of, am ong o th e r facto rs, the com plex s tru c tu re o f excise du ty w hich leaves open som e avenues o f evasion. A ttem pts to achieve m ultip le objectives have com plicated the s tru c tu re o f excise d u ty .

The discussion on policy issues d irected tow ards re fo rm ­ing the s truc tu re o f excises to reduce evasion, therefo re , has to address itse lf to the objectives th a t have con trib u ted to the com plicated structu re . Specifically, the discussion should be concerned w ith tw o questions: (i) w hether the objectives pursued are ap p ro p ria te and (ii) w hether the m ethods em ployed to achieve the objectives are efficient.

Besides the objective o f ra ising revenue, the tw o o ther m ajor objectives o f the excise ra te policy on c o tto n textile fabrics seem to be (i) equity and (ii) encouragem ent o f labour-in tensive techniques o f p roduction . Equity is sought to be achieved by m eans o f a g raded tax s truc tu re w ith reference to co u n t g roups o f fab rics as well as differential tax ra tes on fabrics o f d ifferent prices. E ncouragem ent to labour-in tensive techniques is sought to be given by levying

differential tax ra tes on fabrics p roduced in different sectors, the ra te s varying inversely w ith the labour in tensitsy in production .

It is beyond the scope o f th is study to m ake any judge­m ent on the m erits o f the policy objectives and the em phasis placed on them . A gain, it is the p rerogatiye o f the G overn­m ent to decide upon the ex ten t o f equity to be achieved th rough prov id ing cheap clo th to the com m on consum er and discrim inating against the richer consum er vis-a-vis the poo rer consum er. H ow ever, w hen in ter-sectoral d isc rim ina t­ion is m ade in o rder to p ro m o te labou r in tensity in p ro d u c t­ion , the issue o f re la tive efficiencies o f the three sec to rs— mill, pow erloom and hand loom —also becom e im p o rtan t. U nfo rtunate ly , little system atic w ork has been done to exam ine w hether the in te rest ou tlay saved by reducing cap ita l costs in the labour-in tensive sector is g reater than the increased wage biil. I f such a s itua tion indeed exists, the labour-in tensive sector w ould be profitable, and excise ra te d iscrim ination w ould be requ ired only to enhance this. If, on the co n tra ry , the increased w age bill is h igher th an the in te rest saved, there is a cost in term s o f the loss o f efficiency in p rom oting the labour-in tensive sector.

A recen t W orld Bank study (M azum dar, 1984) w hich exam ines th e relative efficiency o f the th ree sectors, concluded th a t given the wage levels p revailing in the three sectors, only pow erloom s w ere profitab le. F u rth e r, the enorm ous wage differen tia l th a t existed betw een the mill and the pow erloom sectors was crucial to the p rivate profitability o f the pow erloom s1. N ow the p e rtin en t decision should be w hether add itio n a l encouragem ent o f the pow erloom sector in term s o f low er excise ra tes is required and , if so, by how m uch. In o th e r w ords, the s truc tu re o f excise ra tes should be decided on the basis o f detailed studies on the relative efficiency o f the different sectors. A gain , g rea ter em ploym ent in tensity b u t low er labour p roductiv ity , in the segm ent o f

1 If, however, labour is valued at a uniform (lower) powerloom wagein both the miil and powerloom sectors, the study concludes that thesocial profitability is very much lower.

the textile sector which produces basically wage goods, has to be set off against increasing em ploym ent in labour- in tensive cap ita l fo rm ation sectors. O nly then the decision to encourage the sectors or any segm ent o f the sectors can be taken. The excise ra te r o l' cy can be appropria te ly designed only a fte r such a careful analysis.

The second im p o rtan t issue is w hether the m eans to achieve the objectives are ap p ro p ria te . In o th e r w ords, the issue is w hether the excise ra te policy is the m ost efficient m ethod o f ach iev ing the specified objectives.

As m entioned earlier, an im p o rtan t reason fo r having a differential ra te s tru c tu re o f excise du ties fo r co tto n fabrics— depend ing up o n the coun t o f the fabric as well as its p rice— is the desire to aehieve equity . B ut the a tta in m en t o f equity is possible only if the richer sections consum e higher-priced fabrics as well as fabrics o f higher coun ts. But g rada tion o f rates w ith reference to co u n t g roups and prices seems to be unnecessary 10 serve the objective o f equity . I f indeed fabrics o f h igher counts a re priced h igher, the highest basic tax ra te (15 per cent in the case o f m ill fabrics) would au tom atically apply . O n the o th e r hand , i f fabrics o f higher counts are priced low er, they could be consum ed by the p o o re r sections o f society and tax ing them a t very h igh rates irrespective o f the ir price w ould be inequ itous. T hus, there is really no case fo r d iffe ren tia tion w ith reference to coun t g ro u p s; differential tax a tio n w ith reference to b ro ad price catagories alone should serve the pu rpose o f equity.

The d iscrim ination in tax ra tes in respect o f b o th coun t g roups and price ranges has tw o im p o rtan t un in tended effects. F irs t, it provides a vast avenue for the evasion o f the tax th ro u g h m isclassification o f both co u n t categories an d p rice ranges. To p reven t the m isclassifieation o f c lo th o f d ifferent cou n t groups, the lab o ra to ry tests requ ired at presen t can be avoided by levying tax rates vary ing only w ith the b road price ranges o f the c lo th . I t is necessary to stress th a t d ifferen tia tion has to be m ade only in term s o f b road price categories to reduce the possibility o f evasion o f th e tax th ro u g h p rice m isclassification ; for, ra te differenti

a tio n o n n arro w price-range categories enhances the possibility o f m isclassification. Secondly, ra te d ifferen tia tion by coun t g roups produces th e un in tended effect o f less efficient u tilisa tion o f inputs- As a consequence o f th is tax policy, the sp inning m ills w ould p roduce yarn o f low er counts even from long stap le co tto n to avo id pay ing excise du ty a t h igher ra te s a lthough yarn o f h igher coun ts can be p roduced . As yarn o f low er coun ts yields low er q u an tity o f c lo th , to ta l clo th o u tp u t w ould be m uch less as a conse­quence o f the excise ra te policy2 (D esai, 1981).

The excise du ty on co tto n yarn to o adds to th is un in ten ­ded effect. T he specific n a tu re o f the duty , the ra te increas­ing w ith yarn coun t, p rovides the incentive to m anufac tu re yarn o f low er coun ts even th ough h igher coun ts can be p ro ­duced from a given quality o f co tto n . I t w ould therefo re seem to be ra tio n a l to recom m end th a t co tto n yarn may be subjected to ad valorem ra te s o f tax , th e ra tes varying w ith the price o f y a rn , on the lines suggested by the Ind irec t T axation E nquiry C om m ittee (G overnm en t o f Ind ia , 1978). This w ould, besides ensuring m ore efficient u tilisa tion o f co tto n , also avoid e lab o ra te lab o ra to ry tests by the Excise D ep a rtm en t to verify th e y a rn count.

T he Ind irect T axation Enquiry C om m ittee exam ined th is issue in d e ta il and concluded th a t there w as no ju s t i­fication fo r taxing the lo w er priced clo th consum ed by the poo rer sections o f the com m unity a t very h igh ra tes merely because the c lo th was m ade from yarn o f higher coun ts. The C om m ittee recom m ended a telescopic ra te struc tu re in term s o f broad price categories. C onsequently , the five-fold ra te ca tegorisation in term s o f coarse, m edium A, m edium B, fine and superfine c lo th w as abo lished in 1977, bu t ca te­gorisation w as still m ade in term s o f fabrics o f m ore and less th a n 41 counts®. T his, in o u r op in ion , seems to be w holly unnecessary. As sta ted by the Ind irec t T axation

* A kilogram of yarn of about 40 counts yields only 10 metres of cloth whereas yarns of higher counts yield 15 metres of cloth per kilogram.

3 Changed subequently to 51 counts.

E nquiry C om m ittee , “ the real test to app ly in d istinguish ing betw een the clo th consum ed by th e rich and th e p o o r should be the price fac to r and on th is basis, the cheaper cloth should be taxed a t low er r a te .” W e w o u ld therefo re suggest th a t the recom m endation o f the C om m ittee on th e ra te s tru c tu re should be im plem ented in its en tire ty an d a te le­scopic ra te s tru c tu re should be im posed on fabrics d istingui- shed in term s o f b road price categories.

W e have m entioned earlier th a t in te r-sec to ral d iffe ren tia t­ion in the ra tes o f excise du ty leads to in te r-sec to ra l m is­classification and evasion o f du ty . T he tw o im p o rtan t avenues o f such evasion are: (i) exem ption o f h an k yarn w hich is presum ed to be used only in han d lo o m s and(ii) exem ption o f pow erloom fabrics processed in h an d processors. W e have m entioned th e existence o f w idespread evasion o f excise d u ty on y a rn as well as fabrics th ro u g h the abuse o f these exem ption provisions. U se o f han k y a rn on a significant scale in th e pow erloom s a fte r th e rew ind ing o f the h a n k yarn in to cones o r p irn s resu lts in th e w ide­spread evasion o f the yarn d u ty . S im ilarly , m isdeclaring pow er-p rocessed fab rics as hand-processed leads to evasion o f the d u ty on c lo th on a significant scale.

In view o f the w idespread evasion o f th e tax th ro u g h m isclassification o f c lo th , it is necessary to question w heth er it is wise to con tinue w ith these exem ptions an d w hether the excise policy is really a p p ro p ria te fo r encouraging th e con­cerned sectors. Besides the estim ate o f evasion o f excise du ty , even the official in fo rm ation on clo th p ro d u c tio n deri­ved from yarn delivery is rendered m isleading due to th is m isclassification.

G iven th a t the exem ption accorded to h an k yarn is the basic cause o f th is m isclassification and tax evasion, w ith ­d raw al o f the exem ption becom es im pera tive . T he issue, how ever, is how th is can be done i f we have to con tinue the encouragem ent to the labour-in tensive h and loom sector.

In our op in io n , th is can be done in e ither o f tw o ways. F irstly , one can evolve a bonded m ovem ent system w herein h ank yarn can be sold to hand loom cooperatives w ho w ould ensure the d is tribu tion o f the yarn to the actual p roducers.

This m ay, how ever, c rea te enorm ous adm in istra tive problem s fo r the p roposed cooperatives as there exist a very large num ber o f very sm all p roducers in th is sector. A lternatively , it m ay be p referab le to levy the tax on h ank ya rn a t th e ra te s app licab le to n o n -hank yarn , an d the a m o u n t thu s collected m ay be p loughed back to the hand- loom industry th ro u g h a schem e o f subsidies- The m ethod will be sim ilar to the levy o f “ ad d itio n a l” excise du ty , the proceeds o f w hich are earm arked to subsidise con tro lled c lo th and Jan a ta c lo th . W e are therefo re o f the view th a t exem ption accorded to h an k y a rn shou ld be w ithdraw n.

A no ther im p o rtan t avenue o f evasion arises from the exem ption accorded to the pow erloom and hand loom fabrics processed by the hand-p rocesso rs. P rocessing includes singeing, desizing, scouring , m ercerising, bleaching, dyeing, p rin ting , p re -sh n n k in g an d chem ical finishing opera tions. T he trad itio n a l hand-processing industry d id n o t use m achines and even today , th ere is m uch to be said in favour o f encouring a rtisan s in th is secto r by giving excise exem ption and o th e r advan tages to them . In recen t tim es, how ever, a new class o f hand-processors has em erged using soph isti­ca ted m achines iden tical to the pow er-processors and each processing ab o u t 20,000 m etres o f c lo th p er day. I t is e sti­m ated th a t in 1977 they processed a b o u t 122S m illion m etres o f c lo th and em ployed ab o u t 80,000 w orkers (G overnm en t o f Ind ia , 1980b) O n these processors, excise d u ty a t com ­pounded rates w as levied from 1973-74 u n til 1.4.1978. This w as abolished w ith effect from 1.4.1978. w hen the pow erloom clo th processed in hand-p rocessing un its w as com pletely exem pted. H ow ever,under the no tification 130 o f 1982, eligibility fo r exem ption has been lim ited to 15,000 m etres p e r day in a hand-processing un it. But, i t should be no ted th a t th is lim it is ad eq u a te enough to claim exem ption for v irtua lly the en tire am o u n t o f c lo th processed in hand- processing un its. T he ra tes o f com pound levy in 1976-77, on the sten tering and m ercerising m achines respectively , were Rs 4500 and R s 5000 p er year.

T here is m uch to be said in favour o f im posing a t least a com pounded levy on these independent hand-processors as

it existed from 1973-74 to 1976-77. W e have already sta ted th a t the existing study on th e relative efficiencies o f the th ree sectors ind icates th a t pow erloom s are m ore profitable than the m ill secto r due to th e existence o f enorm ous w age differ­entials, and a fu rth e r advan tage in term s o f excise concessions does no t seem to be necessary . Besides, it should be noted th a t the sten tering and m ercerising m achines used by the h and-processors are iden tical to those used by the pow er- processors, an d a lthough to o p era te them , they have to em ploy a la rger num ber o f lab o u re rs , the labourers find the w ork very exhausting (G overnm en t o f In d ia , 1980b). Besides, the W ork ing G ro u p on H and P rin ting and H an d Processing In d u stry concluded th a t “ . . . th e sub stan tia l excise benefits enjoyed by the hand-processing un its are n o t being passed o n to the consum ers o r the labourers em ployed in the In d u s try ” (G ov ern m en t o f Ind ia , 1980b, p .6). F u rth e r , exem ptions g ran ted to the pow erloom fabrics processed by independen t hand-p rocesso rs have resu lted in the large- scale evasion o f the tax th ro u g h m isclassification o f pow er-processed fabrics as hand-processed . In view o f these , there does n o t seem to be really a case fo r giving exem p­tions to hand processing u n its w hich use m achines fo r sten tering and m ercerising and the tax applicable to pow er- processed pow erloom clo th shou ld be applicable to these. H ow ever, it m ay be difficult to adm in ister the levy due to the existence o f a large num ber o f hand-processors. T herefore, to begin w ith , a com pounded levy on the lines th a t existed d u rin g the period 1973-74 to 1976-77, on sten tering and m ercerising m achines could be revived, b u t perhaps a t h igher ra tes. G radually , th e levy should be m ade to vary w ith th e value o f c lo th o u tp u t. T he W orking G ro u p on H and P rin ting and H an d Processing In dustry (G ov­ernm ent o f Ind ia , 1980b) also has recom m ended th e levy o f excise a t 3 per cen t on all m anually operated m achines p ro ­cessing c o tto n textiles, w hich could be im posed w hen it becom es possib le to m o n ito r th e p ro duction flow o f these units.

A n o th e r im p o rtan t issue th a t requires the im m ediate a tte n ­tion o f policy m akers is the u rgen t need to foster co o p era tio n

particu la rly betw een the Office o f the Textile C om m issioner and the C entral B oard o f Excise and C ustom s. The lack o f coo rd ination betw een the tw o has resu lted in eno rm o u s loss o f revenue th ro u g h avoidance and evasion o f the excise duty . Specifically, w hile the Office o f the Textile C om m issioner requires only th a t the mill clo th be stam ped, it does n o t go in to the question o f w hether the tax is in fact paid according to the stam ped price. N o r does it exam ine in detail w hether the stam ped price has any relevance to the cost o f p roducing the specified quality o f c lo th . The Excise D ep artm en t on its p a r t is indifferent to the stam ped price and m erely collects excise du ty accord ing to the invoice price. O ur investigation has revealed th a t o ften the invoice prices are low er th a n the stam ped prices by over 20 p er cent. The consum er, how ever, generally, does n o t get the benefit o f the low er tax paid as he does no t have any m eans o f know ing the invoice price.

T hus, w hile the m anufac tu rers and trad e rs can recover the tax on the stam ped p rice from the consum ers, they w ould pay a substan tially low er am o u n t to the G overnm ent. To avoid this, tw o im p o rtan t m easures are called fo r. F irs t, the Textile C om m issioner’s Office and th e Excise D ep a rtm en t should w ork in close co o p era tio n and it should be m an d ato ry th a t the invoice price on w hich excise d u ty is pa id should be the stam ped price . Secondly, the Textile C om m issioner’s Office should exam ine the re la tionsh ip betw een the cost o f p rodu ctio n and the invoice/stam ped price o f the clo th . In th is, they could seek the co o p era tio n o f the B ureau o f Industria l C osts and Prices w hich cou ld u ndertake detailed co st studies.

C oord ination betw een the offices o f the Textile C om m is­sioner and the C en tra l B oard o f Excise and C ustom s can also be help fu l in p reventing evasion th ro u g h suppression o f the o u tp u t o f yarn and fabrics- A lthough we have n o t found any significant ex ten t o f evasion th rough th is m ethod , we do n o t a lto g e th e r ru le o u t the possib ility in som e specific cases. A ctually , the R eport o f the E xpert G ro u p o n Textiles (G ov­ernm ent o f In d ia , 1976) m entions th e cases o f som e mills show ing low er p ro d u c tio n in C en tra l Excise records than w h a t is show n in the re tu rn s furn ished to the Textile C om m is­

sioner. This can be easily avoided by co o p era tio n betw een the tw o d ep artm en ts .

A n im p o rtan t fac to r inh ib iting the effective im p lem en ta t­ion o f the tax on the unorganised secto r is the lack o f in fo r­m ation on th is sector. The num ber o f pow erloom s, hand- loom s, m echanised hand-processors and pow er-processors, the type o f technology em ployed in them , and the quan tum o f cloth m anufactu red and processed, by quality an d price ranges, are som e o f the po in ts on w hich regu lar flow o f in fo rm ation is essen tia l fo r effectively enforcing the tax. This can be collected only th ro u g h period ic surveys, w hich we th ink should be conducted . Besides, it is also essential to conduct studies on the relative efficiencies o f the th ree sectors on the lines o f the W orld Bank study (M azu m d ar, 1984) by enhancing the sam ple size. These should effectively plug the in fo rm ation gap and shou ld go a long w ay in ensuring better ad m in is tra tio n and enforcem ent o f th e tax.

References

A hm edabad Textile In d u stry ’s R esearch A ssociation (1982). N orm s fo r the Textile Industry, A hm edabad: A TIR A .

2. A llingham , M .G . and Sandm o, A. (1972). “ Incom e Tax Evasion: A T heoretical A nalysis” , Journal o f Public Econom ics, V o l.l, N o .3/4.

"37 A nand , R itu (1979). “ C hoice o f Technology in Textile In d u s try ” . G overnm en t o f Ind ia , P lanning C om ­m ission, P ro jec t A ppraisal D ivision, 1978-79.

4 ^ C encus P ub lications (1978). Cencus Central Excise Tariff 1978-79. N ew D elhi.

^ 5 . D esai, A shok, V. (1981). “ Technology and M ark e t under G overnm ent R egu la tion” (M im eo). New D elhi: N ationa l Council o f A pplied Economic Research.

6. E rkk i, K oskela (1983). “ A N o te on P rogression ,Penalty Schem es and Tax Evasion” , Journal o f Public Economics, V ol.22, N o .l .

7. G overnm ent o f Ind ia (1976). The Report o f the E xp ertGroup on Taxation, Bom bay: C o llectorate o f Excise.

8. G o v ern m en t o f In d ia (1977, 1978). Report o f the In ­direct Taxes, Enquiry Com m ittee, P arts I& II, New D elhi: M inistry o f F inance (D epartm en t o f R e­venue).

G o vernm en t o f In d ia (1978). Consumer Purchases oj Textiles. Bom bay: M arke t R esearch W ing, Textile C om m ittee, M inistry o f Com m erce.

G overnm ent o f Ind ia (1978). Consumer Purchases and Price Trends o f Textiles. Bom bay: M arke t R e­search W ing, Textiles C om m ittee, M inistry o f C om m erce. M o n th ly B ulletin Nos.88-99.

11. G overnm ent o f Ind ia (1979). Report o f the C om m ittee on Controls and Subsidies. New D elhi: M inistry o f F inance.

<'12. G overnm en t o f Ind ia (1979). Consumer Purchases o f Textiles. Bom bay: M arket R esearch W ing, Textile C om m ittee , M inistry o f Com m erce.

/iS . G overnm ent o f Ind ia (1979). Bom bay: Consumer Pur­chases and Price Trends o f Textiles. M arke t R e­search W ing, T extile C om m ittee , M inistry o f C om m erce, M onth ly B ulletin , N os. 100-111.

14. G overnm en t o f Ind ia (1980). R eport o f the E xpert Com- m iitee on T ax M easures to Prom ote Employment. M in istry o f F inance, D ep artm en t o f Revenue.

G overnm en t o f In d ia (1980a). Indian Textile Bulletin, A nnual N um ber Vol. X X V I N o .5, Bom bay: Office o f the Textile C om m issioner, M inistry o f C om ­merce.

16. G overnm ent o f Ind ia (1980b). R eport o f the WorkingGroup on H and-Printing Industry and H and-Process­ing Industry, New D elhi: M inistry o f Com m erce.

17. G overnm ent o f Ind ia (1984). S ta tistica l Year Book,Central E xcise Vol. 1. New D elhi: D irec to ra te o f S tatistics & Intelligence, C entral Excise & C ustom s.

18. G overnm ent o f K era la (1976). R eport o f the Committeeon C om m odity Taxation, T rivandrum .

Jain , L .C . (1983). “ H andloom s Face L iq u id a tio n ” Economic and Political W eekly, V ol.X V III, N o. 35.

M azum dar D ipak , (1984). The Issue o f Sm all versus Large in the Indian Textile Industry, An A nalytical and H istorical Survey. W orld Bank Staff W orking P apers, N o .645. W ashington D .C .: The W orld Bank.

>2l. M ill O w ner A ssociation (1982). M emorandum Sub­m itted by the M ill Owners Association, B om bay to Tripartite C om m ittee, Bombay.

22. N atio n a l In s titu te o f Public F inance and Policy (1981). Sales T ax System in Bihar. New D elhi.

^ 3 ^ N a tio n a l P roductiv ity C ouncil (1976). Productivity Trends in Cotton Textile Industry in India, New D elhi.

24. Sinha, N ., Bagchi, A. an d Sud, B.L. (1983). “ Evasiono f Excise D uty on P lastics” (M im eo)- New Delhi: N atio n a l In stitu te o f Public F inance and Policy.

25. S rin ivasan, T .N . (1973). “ Tax Evasion: A M odel” ,Journal o f Public Economics, V ol.2.

26. S rivastava, D .K . (1983). Evasion o f E xcise Duties: CaseS tudy o f Copper, (M im co). New Delhi: N atio n a l In s titu te o f Public F in rn c e and Policy.

27^ The Ind ian C o tto n M ills’ F edera tion (1983) H andbook o f S ta tis tics on Cotton Textile Industry , 1958-83, B om bay.

Structure of Excise Duty on Cotton Textile Fabrics

Evolution o f the Levy

Excise d u ty on c o tto n textile fabrics levied u n d er ta riff item N o. 19, is one o f the o ldest levies. O rig ina lly , in th e late 19th cen tury , the levy w as conceived as an an tip ro tec tiv e m easure to enhance the com petitiveness o f th e c lo th p ro d u c­ed in L ancash ire m ills. In in d ep en d en t Ind ia , th e levy was in troduced in January , 1949, on only the superfine varie ty o f cloth a t the ra te o f 25 p er cen t. G radua lly , o th e r varieties w ere b ro u g h t in to the fold o f the excise n e t. T he levy o f handloom cess in 1953, ad d itiona l excise du ties in lieu o f sales tax in 1957, in tro d u c tio n o f c o m p o u n d ed levy procedure for sm aller pow erloom u n its in 1955 an d its w ith d raw al in 1977, rep lacem ent o f specific s tru c tu re w ith an ad valorem struc tu re in 1976, and m ajo r changes in ta riff descrip­tion and du ty s tru c tu re in 1977 are im p o rtan t lan d m ark s in the evolution o f the s truc tu re o f excise d u ty on c o tto n textile fab rics.1

The m ajo r changes b ro u g h t ab o u t in 1977 were o f far- reaching significance and since then only a few m inor changes have been m ade. T herefo re, the cu rren tly p revailing s tru c tu re is largely determ ined , a lbeit w ith m in o r m odifications, by these changes. Essentially , besides the change in ta riff descrip­tion o f co tto n fabrics, the ra te s truc tu re w as also changed from the five-fold classification o f superfine, fine, m edium A,

1 A detailed discussion on the evolution of excise duty on cotton textiles is provided in the Report o f Indirect Taxation Enquiry Committee, Government of India, 1977.

m edium B and coarse in to largely an a d valorem telescopic form . The changes effected were, to ta l exem ption o f n o n ­pow er/steam processed pow erloom and h and loom fabrics, low er ra tes on pow erloom and hand loom fabrics processed by independent processors, exem ption from com pounded levy on pow erloom s excepting u n au tho rised pow erloom s and exem ption o f yarn duty fo r the com posite m ills. Subsequently, fu rth e r m odifications were m ade w herein yarn duty exem p­tion fo r the com posite m ill sec to r was repealed and the stru c tu re o f tax rates reverted to a graded , differential form , the ra tes depending on the price o f leviable fabrics in respect o f fabrics o f less th an 41 counts, while a un iform ra te app li ' ed to fabrics o f h igher co un ts. In the follow ing paragraphs, we explain the s truc tu re o f excise duty prevailing in 1978-79, the year fo r w hich we have estim ated the extent o f evasion. The im p o rtan t changes effected in subsequen t years are ex­plained thereafter.

Definition o f Cotton Fabrics

F o r the p u rpose o f the C en tral Excise Tariff, ‘co tto n fabrics’ are defined so as to include all varieties o f fabrics m anufactured e ither w holly o r p a rtly from co tton . In the la tte r case, a fabric is classified as co tton fabric i f (i) in such fabric, co tto n p redom inates in w eight o r (ii) such fabric contains m ore th an 40 per cen t by weight o f co tton an d 50 per cen t o r m ore by w eight o f non-cellulosic fibres or yarn or bo th .

I t is specified th a t the varie ties o f c lo th under ta riff item 19 would include dhoties, sarees, chaddars, bed sheets, counterpanes, tab le-clo ths, em broidery in the piece, in strips o r in m otifs and fabrics im pregnated , coated , or lam inated w ith p rep ara tio n s o f cellulose derivatives or o f o th e r artificial p lastic m aterials.

In the case o f fabrics em broidered , and im pregnated , coat­ed, etc., the percentages referred to above are to be consider­ed w ith reference to the base fabrics.

The s ta tu to ry classification o f T ariff item 19 refers to the fo llow ing th ree categories, as far as our reference year, viz. 1978-79, is concerned:

(i) C o tto n fabrics o th e r th a n (i) em bro idery in th e piece, in strip s o r in m otifs, and (ii) fabrics im pregnated , o r lam inated w ith p rep ara tio n s o f cellulosic derivatives or o f o th e r artific ia l p lastic m aterials.

(ii) E m broidery , in the piece, in strips, o r in m otifs, in or in re la tion to the m anufac tu re o f w hich any process is o rd inarily carried on w ith the aid o f pow er.

(iii) C o tto n fabrics im pregnated , coated , o r lam inated w ith p rep ara tio n s o f cellulosic derivatives o r o f o th e r a r ti­ficial p lastic m aterials.

A fo u rth category was ad d ed to the s ta tu to ry classi­fication in 1980, as:

(iv) C o tto n fabrics covered p a rtia lly o r fully w ith textile flocks o r w ith p rep a ra tio n s conta in ing textile flocks such as flock p rin ted fabrics an d flock coated fabrics. Besides th is, sub-item I w as redefined to exclude sub- item IV, in add itio n to sub-item s II and III . M ore­over, sub-item I w as d iv ided in to the fo llow ing tw o categories:

(a) C o tto n fabrics, n o t subjected to any process.(b) C o tto n fabrics, sub jected to the process o f

bleaching, m ercerising, dyeing, p rin ting , w ater-p roofing , rubberising , shrink-proofing , o rgand ie processing, o r any o th e r p rocess or any tw o or m ore o f these processes.

The s ta tu to ry basic ra tes o f du ty for sub-item s I an d II were fixed a t 20 per cent. O n sub-item s III and IV , thesta tu to ry ra te was fixed a t 30 per cen t. In add ition to thebasic du ty , a special du ty levied a t 5 per cen t ea rlie r w as en ­hanced to 10 per cen t in 1980.

The s ta tu to ry ra tes merely rep resen t the ceiling ra te s— these are the m axim um ra tes the G overnm en t can levy. The a c tu ­ally levied ra tes are governed by the effective ra tes notified by the G overnm ent from tim e to tim e.

Structure of Effective Rates 1978-79

C o tto n textile fabrics are subjected to the basic, ad d itio n a l

and special excise du ties. In ad d ition , hand loom cess is also levied, the proceeds o f w hich are earm arked fo r the develop­m ent o f the h and loom sector. T he proceeds from ad d ito n a l excise du ties are earm arked to subsidise the con tro lled c lo th and Ja n a ta cloth schemes.

In o rder to understand the s tructu re o f effective ra tes th a t prevailed in 1978-79, it is necessary to d istinguish betw een(i) com poiste mills; (ii) pow erloom s, and (iii) handloom s and (iv) em broidered im pregnated and coa ted fabrics. The s tru c ­tu re o f tax ra tes on com posite m ills, pow erloom s and h a n d ­loom s is ou tlined in T able A .I . The ra tes applicab le on em ­broidery, im pregnated an d coated fabrics are ind ica ted in Table A. 2.

Table A. 1 is self-explanatory , b u t a few observations m ay no t be ou t o f place. F irs t, d istinc tion is m ade betw een clo th o f m ore th an 41 coun ts and th a t o f less th an 41 coun ts. A ll clo ths o f m ore than 41 counts are taxed a t un iform ra tes w ith in the sector, irrespective o f p rice and category (sound, fen t o r rag ). O n clo ths o f less th an 41 co un ts, how ever, tax ra tes vary accord ing to the price o f the fab ric and category . The second im p o rtan t fea tu re o f the ra te s tru c tu re is the existence o f in ter-sec to ral ra te differences. G enerally , on pow erloom fabrics processed by com posite m ills an d inde­penden t processors (w ith the aid o f pow er), the tax ra tes are respectively low er th an th o se im posed in the m ill sector, by 30 per cen t subject to a m axim um reduction o f 3 percentage po in ts. S im ilarly, duty a t 55 p er cen t and 40 p er cen t o f the m ill ra tes are applicab le on h and loom fabrics w hen processed by the com posite m ills and indep en d en t processors.

Structure of Exemption

T here exist a num ber o f notifications exem pting various types o f co tto n fabrics from paym ent o f du ty . The im p o rtan t one am ong these from our p o in t o f view is the exem ption accorded to clo th produced in the decen tra lised sec to r. I t should be n o ted th a t grey fabrics m anufac tu red in pow erloom s and hand loom s a re com pletely exem pted. Even these fabrics i f processed w ith o u t th e aid o f pow er o r steam are n o t subject

R ates o f Excise Duty on Cotton Fabrics Sector-wise (1978-79) (All rates given are in percentage)

SI. Description No.

Mill-made

Handloom Fabrics Processed by independent

processors Approved Not approved by Govt. by Govt.

Powerloom fabrics processed by independent processors

(I) (2) (3) (4) (5)

1. Cotton Fabrics (including fents and rags) in which the average count of yarn is 41s or more

2. Cotton Fabrics (other than those in which the average count of yarn is 41s or more)* whose value per square metre:

15 5 without printing or dyeing or both

9 with printing or dyeing or both

8**

12

»

12

(a) Does not exceed Rs 4 2 080 1.40 1.40

(b) Exceeds Rs 4 but does not exceed Rs 6 3 1.20 2.10 2.10

(c) Exceeds Rs 6 but does not exceed Rs 7 4 1.60 2.80 2.80

(d) Exceeds Rs 7 but does not exceed Rs 8 6 2.40 4.10 4.20

302 ev

asion

o

fexcisb

duties

in in

dia:

study of

cotto

n textile

fab

ric

s

(1) (2) (3) (4) (5)

(e) Exceeds Rs 8 but does not exceed Rs 9 8 3.20 5.60 5.60(f) Exceeds Rs 9 but does not exceed Rs 10 10 400 7.00 7.00

(g) Exceeds Rs 10 but does not exceed Rs 11 12 6.00 9.00 9.00(b) Exceeds Rs 11 but does not exceed Rs 12 14 8.00 11.00 11.00

(i) Exceeds Rs 12

3. Fents and rags with average count of yarn less than 4>swhose value per square metre:

15 9.00 12.00 12.00

(a) Does not exceed Rs 4 2 0.80 1.40 1.40

(b) Exceeds Rs 4 but does not exceed Rs 7 3 1.20 2.10 2.10(c) Exceeds Rs 7 but does not exceed Rs 9 6 2.40 4.20 4.20

(d) Exceeds Rs 9 but does not exceed Rs 12 10 4.20 7.00 7.00(e) Exceeds Rs 12 15 9.00 12.00 12.00

Notes:

• Cotton fabrics of this group when classified under by 50 per cent.

‘controlled cloth’ variety, are subject to a tax rate reduced

(Notes contd)

" • In the budget proposal effective from 1.3.1979 the duty was increased from 8 per cent to 12 per cent. It was subsequently reduced to 11 per cent with effect from 24.4.1979.

(i) The effective rate on further processing of duty-paid fabrics of composite mills (both for less than and more than 41 counts groups) is less of tax already paid.

(ii) Handloom fabrics processed by registered handloom cooperative societies and hand processors not using power or steam are exempted from paying duty.

(iii) The above effective rates of duty on cotton fabrics are composite ones representing basic and additional duty in lieu of sales tax. The allocaiion between basic and additional duty is 75 per cent and 25 per cent, respectively.

(iv) In addition to the above, there is a special excise duty of 5 per cent on basic duty effective from 1.3.1978 and additional excise duty @ 10 per cent o f basic duty effective from 4.10.1978.

(v) For handloom fabrics processed by independent power processors not approved by Government and powerloom fabrics processed by independent power processors, there was a concessional rate of duty on processing (i.e., bleaching) without printing or dyeing or both of 8 per cent ad valorem vide notification No. 226/77 dated 15.7.1977. This concession has been withdrawn through the 1979-80 budget vide notification No. 60/79 dated 1.3.1979.

Source: Government of India, Ministry of Finance, Department of Revenue. Report o f Expert Committee on Tax Measures to Promote Employment, 1980, New Delhi.

2. Cencus Publications, Cencus Central Excise Tariff, 1978-79, New Delhi.

304 BVASION

OF EXCfSB

DUTIBS IN

INDIA: STUDY

Of COTTON

TEXTILE fA

BRlC

S

TABLE A.2 Effective R ates : Em broidery etc .

(As on 1.3.1978)

Effective rates (per cent)

ad valorem

Description of goods '

Notificationnumber

Rs 9.3S per metre of embroidery machine per shift plus the duty payable on base fabrics.

Embroidery in the piece, in strips and in motifs.

85/71

7 plus duty payable on base fabrics, if not already paid.

Embroidery in the piece, in strips, and motifs, where pro­visions under notifi­cation number 85/71 are not applied.

65/69, 271/77 and 272/77

30 plus duty payable on base fabrics, if not already paid.

Cotton fabrics impregnated, coated or laminated with preparations of cellulose derivatives or other arti­ficial plastic materials (other than low density polyethylene) excluding PVC coated conveyor belting.

100/77 and 273/77

24 plus duty payable on base fabrics, if not already paid.

PVC coated or impreg­nated conveyor belting.

273/77 and 100/77

Source: Cencus Publications (1978) Cencus Central Excise Tariff 1978-79, New Delhi.

to tax. A sum m ary o f various exem ptions a lo n g w ith the re levant no tifica tions is p resen ted in T ab le A3.

Changes in the T ariff Subsequent to 1978-79

In o rd e r to bring th e discussion up -to -date , we have presen ted below a sum m ary o f changes th a t w ere in tro d u ced a fte r 1978-79. These changes have reference to the tariff struc tu re as it w as on 1.3.1978 in com parison to its position

on 1.4.1979, 1.4.1980, 1.3.1981 and 15.7.1982. These dates refer to the W orking Schedules o f the C en tra l Excise T ariff published subsequently .

A s on 1.4.1979

(i) E xp lanation (III) w as added to the defin ition o f the item specifying th a t floor coverings falling u n d er item 22G are n o t included u n d er item 19.

(ii) Exem ption on rubberised co tton fabrics w as w ithdraw n (N otification N o. 39/68).

TABLE A.3 Schedule o f E xem pted F ab rics

SI. D escrip tion o f goods N otificationN o. N o .

(1) (2)

1. D am aged o r su b -stan d ard fabrics 69/69(chindies o f 23 cm s. o r less inlength) belonging to item 19(1) and (II) o r o therw ise discarded fabrics d u ring processing.

2. Fabrics belonging to item 19(1)fully exem pted depend ing on the fo llow ing end-uses: (i) in tended for use in textile p rin ting , dyeing, b leaching, o r sizing process; (ii) drill, long clo th , and m ark in in tended fo r use in the coated abrasives industry ; (iii) in tended fo r use in m anufactu ring c o tto n ab so rben t lint; 70/69(iv) hosiery garm ents; (v) trim m ingsand cu ttings o f less than 7.5 cms. in w id th if in tended for use in m aking paper; (vi) In d ian N atio n a l F lags; (v ii) surg ical ab so rb en t lint in pack o f 5 kgs. o r less; (viii) fabrics o f 15 cms. o r less in w idth;(ix) unprocessed c o tto n fab rics i f

_____________ (1)_____________________________ (2)

m anufactu red on a hand loom ; (x) processed khad i; (xi) unprocessed co tto n hosepipes and belting woven as such; (xii) hosiery.

3. Fents o f du ty -paid processed co tto n 135/69fabrics arising o u t o f fu rth erprocessing.

4. C hindies (6 cms. o r less in length)o f lam inated, coated, e tc., fabrics 67/70(19 III).

5. C otton fabrics falling under item 80/7619(1) when subjected to finishingprocesses specified below:C alendering (o ther than calender­ing w ith grooved rollers), flanellete- rising, stentering, dam ping on grey and bleached sorts, back filling on grey and bleached, singeing, scour­ing, c ropping o r bu tta -cu tting , curing o r hea t setting and padding .

6. Sam ples o f excisable goods 171/707. Rags o f du ty-paid processed co tton

fabrics arising o u t o f fu rth er 106/70processing

8. U nprocessed co tton fabrics fallingunder item 19(1) m anufactu red on 230/77pow erloom o ther than fabricscontain ing m ore th an 1 /6 th byw eight o f fibre o r yarn or b o th o fnon-cellulosic orig in , and coating,suiting, etc.

9. C otton fabrics [item 19(1)] w hen 137/77processed w ithou t the aid o f pow ero r steam .

10. All varieties o f fabrics coated orlam inated w ith p repara tions o f low 100/77

(1)density po lyethelene.

11. P urchases o f co tto n fab rics ou t o f cash d o n a tio n s fo r re lie f o f the cyclone-affected people in A ndhra P radesh , T am il N adu , P ondicherry ,L akshw adeep , O rissa, etc .

Source: Sam e as fo r Table A .1.2

(iii) E xem ption to com posite m ills w ith respect to duty on th a t p a rt o f value w hich represen ted duty on yarn has been w ith d raw n (N otifica tion N o. 99/77 p a ra 13).

(iv) 6 per cent ad valorem reduction in the effective ra te applicable to canvas, duck , and filter cloth (sound , fen ts and rags) m anufac tu red on pow erloom s has been extended to (a) co tton fabrics con ta in ing m ore th an 1 /6 th by w eight o f fibre or yarn , etc., o f non-cellu losic orig in , (b) coating , suiting, etc., and (c) canvas, duck , and filter c lo th (N otification N o. 223/77).

(v) The d istin c tio n m ade in col. (iii) o f N otification N o. 323/77 betw een average coun ts o f yarn o f 41s o r m ore and less th a n 41s and the co rresp o n d in g m axim um reduction has been deleted and su b stitu ted by a m axim um reduction o f th ree per cen t ad valorem in a ll cases.

(vi) S im ilar changes in th e case o f fents and rags w ere also in troduced .

(vii) U nprocessed co tto n fab rics used in the sam e fac to ry fo r processing w ere exem pted fro m du ty (N otification N o. 290/79).

(viii) Processed c o tto n fabrics w hen subjected to fu rth e r processing in the sam e fac to ry w ere exem pted from duty (N otification N o . 291 /79).

A s on 1.4.1980(i) Special excise d u ty w as raised to 10 per cen t.(ii) A new category w as created fo r c o tto n fabrics covered

partia lly o r fully w ith textile flocks, etc. T he s ta tu to ry ra te o f d u ty fo r th is category w as fixed a t th ir ty p er cen t ad valo­

(2)

337/77

rem p lus the d u ty payable on the base fabrics.(iii) W ith reference to the exem ption regard ing specified

finishing processes (p a ra 9) tw o conditions have been added: (a) N o exem ption is available i f unprocessed co tto n fabrics falling under sub-item I (a) on w hich excise du ty is leviable are subjected to any o f these processes w ith in the factory w here the unprocessed fabrics have been p roduced or (b) if co tton falling under sub-item I are also subjected to any process o ther than specified in the given table w ith in the same factory .

Tw o processes have been added in the list, i.e ., (i) expand­ing and (ii) hydro-ex trac tion w ith the aid o f pow er.

(iv) The d istinc tion betw een fabrics o f an average coun t o f 41s o r m ore and those o f less th an 41s in Col. (iii) o f notification N o . 323/77 w as re-in troduced . The ra tes for sound fabrics, and fents and rags, is to be reduced by 30 per cent in bo th cases bu t in the la tte r case the reduction in the ra te shall n o t exceed 3 p e r cen t ad valorem.

(v) F o r con tro lled d h o ti, saree, e tc ., full exem ption is g ran ted in place o f the existing 50 per cen t reduction .

(vi) Set-off fo r finishing processes under clause (vi) o f N o tification N o. 313/77 is no t included a t th is place in the am ended no tification .

As on 1.3.1981

The effective ra te o f du ty on flocked co tton fabrics, i.e ., item 19(IV) has been specified as du ty leviable on the base fabrics plus 15 per cent ad valorem (N otifica tion N o . 29/81).

As on 15.7.1982

(i) Tw o new provisions were added to the existing list perta in ing to the com pounded levy rates fo r pow erloom s as indicated below:

Provided th a t in the case o f any person w ho has applied to the Textile C om m issioner fo r w ritten perm ission fo r the insta lla tion and w ork ing o f pow erloom o n /o r before the 31st day o f D ecem ber, 1979, the ra te o f du ty shall, subject to the

production o f necessary evidence to the satisfaction o f the p ro p e r Officer o f the C en tra l Excise, be nil u n til such p e r­m ission is g ran ted by the Textile C om m issioner.

P rovided fu rth e r th a t w here such person has n o t produced the w ritten perm ission o f the Textile C om m issioner by the 30th day o f June, 1981 to the p roper Officer, the du ty fixed u n d er this no tification shall be payable fo r the en tire period for w hich he w as assessed nil ra te o f du ty un d er the first proviso.

(Vide N otifica tion N o. 104/81 d a ted 8.4.1981.)(ii) The d istinc tion so fa r based on the d ivid ing line p ro ­

vided by the average co u n t o f yarn o f 41s has been redefined w ith reference to 51s bo th fo r sound fabrics as w ell as fents and rags.

(iii) The fifty per cent reduction fo r th e processing o f co tton fabrics [provision (iia) o f N otification N o. 136/77 and (iiia) o f N otification N o . 226/77], has been changed to a seventy-five per cent reduction .

(iv) W ith reference to the ra te schedule given in N otifica­tio n N o . 226/77, a p a r t from S l-N o .l, referring to fabrics w ith an average coun t o f yarn o f 41s o r m ore, and SI. N o . 2, re fer­ring to fabrics w ith an average co u n t o f yarn o f less than 41s, the following th ird category has been added: “ C o tton fabrics no t specified in SI. N os. 1 and 2” . T he effective ra te o f du ty for this category has been fixed as 15 per cen t ad valorem.

As on 1983-84

(i) The effective ra te o f du ty on cotton fabrics conta in ing m ore than 40 per cen t bu t less than 50 per cen t po lyester was reduced from 15 per cen t to 6.5 p er cen t ad valorem.

(ii) A dditional du ty in lieu o f sales tax on co tto n fabrics im pregnated , coated o r lam inated w ith p rep ara tio n o f cellu­lose derivatives o r o f o th e r artificial p lastic m ateria l is duty fo r the tim e being leviable on fabrics, i f no t a lready paid, plus 10 p e r cent ad valorem.

(iii) The above ra te o f (ii) is also applicable to the c o tto n fabrics covered partia lly o r fully w ith textile flocks such as flock p rin ted fabrics and flock coated fabrics.

(iv) The effective rates o f add itional duty in lieu o f sales tax on co tton fabrics im pregnated , coated o r lam inated with p rep ara tio n s o f cellulose derivatives o r o f o th e r artificial p lastic m ateria l except L D PE is fixed a t the duty leviable on the base fabrics, i f no t already paid , plus 5 per cent ad valorem.

(v) The effective ra tes o f add itional duty in lieu o f sales tax on co tton fabrics covered partia lly or fully w ith textile flocks o r w ith p rep ara tio n s contain ing textile flocks such as flock p rin ted fabrics and flock coated fabrics is fixed ;it the duty leviable on base fabrics, i f no t a lready paid, plus 5 per cent ad valorem.

Important Tariff Definitions

A p art from the definition o f co tton fabrics, discussed earlier, o ther im p o rtan t term s frequently used in the context o f Excise T ariff re la ting to c o tto n fabrics are base fabrics, fents, rags, com posite m ills, cou n t and average coun t o f yarn . The definitions re lating to these are given below :

B A S E F A B R IC SM eans—Fabrics falling under sub-item I o f th is item w hich a re

subjected to the p rocess o f em broidery o r w hich a re im preg­n a ted , coated o r lam inated , w ith p rep ara tio n s o f cellulose derivatives o r o f o th e r p lastic m aterials.

W here tw o or m ore o f the follow ing fibres, th a t is to say,

(i) m an-m ade fibre o f cellulosic orgin;(ii) co tton ;

(iii) wool;(iv) silk (including silk noil);(v) ju te (including B im lipatam ju te o r m esta fibre);

(vi) m an-m ade fibre o f non-cellu losic origin;(vii) flax; and

(viii) ram ie.

in any fabric are equal by w eight, then , such one o f those fibres, the p redom inance o f w hich would ren d er such fabric , falls under th a t item (hereafter in th is explanation referred

to as the applicab le item ) am ong item N os. 19,20,21,22A and 22AA, w hich read w ith the relevan t no tification , i f any, fo r the tim e being in force issued u n d er the C en tra l Excise R ules, 1944, involves the h ighest am o u n t o f du ty , shall be deem ed to be p redom inan t in such fabric and accordingly such fabric shall be deem ed to fall u n d er the app licab le item .

F E N T SM eans—

(i) Bonafide cut-pieces o f co tto n fabrics o f leng th (exclud­ing cut-pieces o f tow els) o f length 45 cm s. o r m ore b u t no t exceeding 90 cm s. w here the w id th o f the fabric is one m etre o r m ore, and o f length 65 cm s. o r m ore bu t n o t exceeding 135 cms. w here the w id th o f the fabric is less th a n one m etre, arising during the no rm al course o f m an u fac tu rin g (including processing) or pack ing o r d raw ing sam ples;

(ii) dam aged co tto n fab rics (excluding dam aged tow els) o f length 45 cms. o r m ore bu t no t exceeding 90 cm s. w here the w idth o f the fab ric is one m etre o r m ore, and o f length 65 cm s. o r m ore b u t no t exceeding 135 cm s. w here the w idth o f the fabric is less th an one m etre; and

(iii) cut-pieces o f length 45 cm s. o r m ore b u t n o t exceed­ing 90 cm s. w here the w id th o f the fabric is one m etre or m ore, and o f length 65 cm s. o r m ore b u t no t exceeding 135 cms. w here th e w id th o f the fab ric is less th an one m etre, cu t from dam aged dho ties or sarees.

RAG S

M eans—(i) Bonafide cut-p ieces o f co tto n fabrics o f length m ore

th a n 23 cms. b u t less than 45 cm s. w here the w id th o f the fabric is one m etre or m ore, and o f length m ore th an 23 cms. bu t less th a n 65 cm s. w here the w id th o f th e fab ric is less than one m etre, a rising d u ring the no rm al course o f m an u ­fac tu ring (including processing) o r pack ing o r d raw ing sam ples; and

(ii) C u t pieces o f dam aged o r sub-standard co tto n fabrics o f length m ore th a n 23 cm s. bu t less th an 45 cm s. w here the

w id th o f the fabric is one m etre o r m ore and o f length m ore th an 23 cms. but less than 65 cm s. w here the w id th o f the fabric is less th a n one m etre.

COMPOSITE MILL(i) M eans a m an u fac tu rer w ho is engaged in sp inning o f

co tton yarn o r w eaving o r processing o f co tto n fab rics w ith the a id o f pow er and has a p rop rie ta ry in terest in a t least tw o o f such m anufactu ring activities;

(ii) “ H and loom fab rics” m eans co tto n fabrics m ade from co tto n y a rn (o th e r th an hand-spun co tto n yarn ) and w oven on loom s w orked by m anual labour;

(iii) “ Independen t p ro cesso r” m eans a m anufactu rer w ho is engaged exclusively in the processing o f c lo th w ith the aid o f pow er an d w ho has no p ro p rie ta ry in te rest in any factory engaged in the spinning o f y a rn or w eaving o f c o tto n fabrics.

COUNTM eans the co u n t o f grey y a rn .

AVERAGE COUNT OF YARN(i) Y arn used in the bo rders o f selvedges shall be

ignored;

(ii) F o r m ultip le-fold yarn , th e coun t o f th e basic single y a rn shall be tak en an d the n um ber o f ends per 25 4 m m . in the reed o r the num ber o f p icks p er 25.4 m m . as the case m ay be, shall be m ultip lied by the num ber o f piles in the yarn ; w here th e re is basic single y am o f d ifferen t coun ts, the coun t o f the basic single yarn w hich has the h ighest cou n t shall be taken to be the co u n t o f each basic single yarn ;

(iii) In the case o f fabrics m anufactu red from co tto n and o ther y arn , the o ther yarn shall, for the afo resaid purpose, be deem ed to be c o tto n yarn ;

(iv) W here th e re a re yarns o f d ifferent coun ts in w arp o r w eft o r b o th , the co u n t o f th e y a rn w hich has the h ighest co u n t shall be tak en to be th e co u n t o f w arp o r w eft, as the case m ay be; an d

(v) The average co u n t can be o b ta ined by app ly ing the fo llow ing form ula:

[(Wi Zi + W , Zj/(Zi + Z2)J

w here,

W i = C o u n t o f w arp W 2 = C o u n t o f w eftZ i = N um ber o f ends p e r 25.4 mm. in the reed Z t — N um ber o f picks p er 25.4 m m . in th e w eft,

th e resu lt being ro u n d ed off, w herever necessary , by trea ting any frac tion w hich is one h a lf o r m ore as one, an d d isregard ­ing any frac tio n w hich is less th a n one half.

A ppendix IIQuestionnaire Circulated for the Survey on

Cotton Textile Fabrics

1. N am e o f the m an u fac tu re r ---------------------------------2. Type o f fabrics and des- — ------------- ----------------

crip tion3. N atu re o f p rocessing and

so rt N o. ---------------------------------4 . D ate ---------------------------------5. C ount w arp ---------------------------------

6. W idth o f the fabrics(in cm s.) ------------------------------ ~"

7. W eight p er sq. m tr. in yarn ---------------------------------8. P ercentage o f d ifferen t

fibre/yarn ---------------------------------

9. Ex-factory cx-fabric stageprice (R s p e r sq. m etre) ------ —------------------------

10. Basic du ty ---------------------------------11. A dditional d u ty (ST) ---------------------------------12. A dd itional du ty (T X ) ------------- -------------------

13- Special duty14. H and loom cess15 D uty on y a rn16. T o ta l

17. A d valorem incidence o f du ty (Per cent)

18. W holesale price including all excise duties

19. O ctroi20. L ocal taxes21. O thers22. R etail price including all

duties23. R em arks

TABLE A .II.l

Number o f Observations in Different Varieties of Cloth Covered by the Survey

SI. V ariety N o.

N um ber o f observations

1. D hoti 272. Saree 263. S h irting 1174. C oating /su iting /d rill 255. Ladies dress m a te ria l 326. Bed sheet/bed cover/chaddars 87. L ongclo th /sheeting 57

TO TA L 292